The GERM Report

-Tunnel for oil prices looks to be getting longer

-Don’t forget your history lesson on Yasser Arafat  

It’s not necessarily out of the question to assume the price of oil, barring any black-swan event, will be stuck where it is until the November elections in the United States. The committee monitoring OPEC+ compliance left the market shrugging with its nothing-burger teleconference in the previous session, and not even a strong showing from China was able to push commodities toward a breakout. Tuesday brings the inevitable spark from commercial oil and product inventories in the United States, which would be supportive if another draw is reported. That said, the busy Atlantic hurricane season should diminish the real impact of US stock levels. We could see a risk premium from the Middle East, however, with protests in Nigeria. And while energy security may be improved temporarily with the Arab Pivot toward Israel, we’re forgetting our history of the Palestinian cause.

A near-5% increase in Chinese GDP and a meeting from the committee monitoring oil compliance was not enough to budge the needle in the previous session. Crude oil prices look to be moving into a tighter tunnel with no major incentives driving the trend in either direction. Even with the usual banter about a US stimulus, the price of crude oil was stuck early Tuesday. The price for Brent was down 0.4% as of 8 a.m. ET to trade at $42.45 per barrel.

There was nothing much from the meeting of the committee monitoring compliance with OPEC-led curtailments Monday apart for a nod toward discipline. Parties to the agreement are playing by the book, it seems, with compliance so far at more than 100%. There was no mention on what to do about the plans to put another 2 million barrels per day back on the market as expected in 2021, though the Saudi insistence that prices won’t crash again was somewhat reassuring. There’s still the Libyan question, however, as barrels continue to land on the water from the North African producer. And looking over the horizon, we have to wonder about the possibility of more Venezuelan and Iranian oil on the market if US Vice President Joe Biden unseats Donald Trump in the November contest.

We could see some movement triggered by the inevitable stimulus talks in the United States. US House Speaker Nancy Pelosi during the weekend put a 48-hour deadline on reaching some sort of agreement, and talks are expected between her and Treasury Secretary Steven Mnuchin. Maybe we’re a bit too bearish on this, but we still believe that politicking will create headwinds for reaching any sort of major agreement. With just 13 days to go before Election Day, neither side can afford to upset the political calculus. Something could develop after the election, but if Trump loses, he’ll likely hold the stimulus hostage as payback. He might do that if he wins too.

Another drain on US commercial crude oil stockpiles is expected from the American Petroleum Institute later on Tuesday. The busy Atlantic hurricane season, however, is certainly skewing the numbers. Rig counts, meanwhile, are recovering, but not really enough to bring us back to any real sense of normalcy. Remember, this is a pandemic. Sequential figures are meaningless because we’re comparing extraordinarily weak data when calculating our percent. Some market watchers are celebrating the increase of a dozen or so land rigs compared to the week ending Oct. 9, but year-on-year rig counts are down by a whopping 569 from this time last year in the United States. Internationally, counts are down from 429 from last year.

We’ve commented over the past few weeks that crude oil prices are trading in a tunnel of between $41 something and $43 something for Brent. Apart from a few wild swings, that tunnel has been unbroken for a while. London oil broker PVM, in a note sent to The GERM Report, looks to the so-called random walk theory to explain price movements lately. This, in simple terms, is a sort of randomness similar to dust particles moving through a ray of sun through the window. The odds of a particle moving in one direction or the other is more or less equal, and this certainly looks to be the case for the price of oil. Last week, for example, Brent moved only 0.19% higher, despite early-week volatility. PVM states that, if you’re betting on oil lately, you may as well flip a coin.

Apart from the Libyan question, we’re noticing the general sense of political tension is spreading globally. Barely mentioned in the press, but a concern nonetheless, are protests in Egypt. Lebanon, meanwhile, continues to deteriorate. And in Nigeria, authorities enacted a 24-hour curfew in the southern state of Lagos. We’ve yet to see any real impact on crude oil exports from Nigeria, but if the situation escalates, it could be ripe for insurgent attacks on the vast network of pipelines and wells in the south.

On the Arab Pivot, we’ve noted before that there could be pipeline developments that could see Arab oil flow north to the Mediterranean. That would be a boost for energy security, considering the numerous risk events in the Persian Gulf last year. An Israeli pipeline company on Tuesday said it signed a preliminary deal to pipe oil from the United Arab Emirates with the aim of delivering oil from the Red Sea to a Mediterranean port. The arrangement was secured in part with support from US Treasury Secretary Mnuchin, who visited the UAE earlier this week. On its surface, the pipeline would almost certainly avoid an Iranian risk premium, but it has it geopolitical disadvantages. Arab deals with Israel have evolved along with the warming to the Jewish state. That détente, however, ignores, and largely eliminates, the Palestinian question. Washington diplomacy, for all intents and purposes, has awarded Israel for bad behavior in the Palestinian territories, and does little to address human rights concerns.

On Tuesday, a delegation from the UAE visited Israel in a historic first. A member of the Palestinian Liberation Organization called the visit “shameful,” while Hamas said from Gaza the visit would only embolden Israel to take more land. The Arab Pivot effectively renders the Oslo Accords, a 1995 agreement that awarded the Palestinians the right to self-rule over the West Bank and the Gaza Strip, moot. The Oslo Accords earned Israeli leaders Shimon Peres and Yitzhak Rabin, along with Palestinian leader Yasser Arafat, the Nobel Peace Prize in 1994. Twenty years before that, Arafat addressed the United Nations with a pistol in one hand and an olive branch in the other. Fatah, which evolved into a political movement, was seen more as a terrorist organization in its nascent form and played a pivotal role in destabilizing the region. We wonder if the Arab Pivot and the end of the Palestinian cause will rekindle that option.