The GERM Report

Risk level: Orange

RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)

THE BOOSTER SHOT

-As the US burns, terrorism rises again.

-So about the UAE …

Crude oil prices moved largely on the pandemic and news circulating about various vaccine trials underway to prevent COVID-19. US authorities backed a drug, Regeneron, during the weekend that can help reduce the severity of the illness, while the British government asked for swift authorization of the Pfizer-BioNTech genetic-based vaccine. Elsewhere, the political chaos continues in the United States, with President-elect Joe Biden forced to go hat-in-hand for funds to facilitate that transition because Trump won’t concede. That distraction is an opportunity for some. Among the groups seizing the moment are terrorist organizations on the wrong side of US national interests.

Crude oil prices showed some volatility in intra-day trading last week, though the mood was largely upbeat – but separate from the economic reality. A look far into the future shows we’ll eventually return to some semblance of normalcy, though the here-and-now looks remarkably different. That, however, is a sentiment shared largely by the United States and Europe, where COVID restrictions are political fodder. For the Asia-Pacific, home to some of the larger economies in the world, demand has been resilient. US crude oil prices look to be establishing a new consensus. Brent crude oil, meanwhile, was up 5.1% on the week, in line with our Red alert, to finish trading Friday at $44.96 per barrel.

US democracy stands at a profoundly disturbing precipice with the sitting president essentially trying to overturn the very bedrocks upon when the nation was founded. And many in his own political party are complicit in the destruction. This is not normal. This is not acceptable. And, as the president and his supporters have shown, there’s nothing a US voter can do about it at the moment. This is a deeply sad moment in American history. All this comes at a moment when consumer confidence among members of the OECD is at its lowest level in nearly a decade.

And it’s having a real impact on geopolitical issues. The Trump administration has made good on its campaign pledge by drawing down the number of troops in Iraq and Afghanistan. The decision seemingly is a political rather than a defensive one. On the arrival of US Secretary of State Mike Pompeo, the Afghan government suspected the Taliban of launching attacks on the capital, Kabul, that left at least eight people dead and another 30 injured. Reporting from ABC News finds the situation in Afghanistan has deteriorated to the point that its reminiscent of the 1990s when various warlords controlled the country. Guided by the foreign policy doctrine of containment, the United States entered Afghanistan in the 1980s to beat back the Soviet Union. That later evolved into concerns about Soviet influence over oil in the Middle East, a concern that should still resonate today.

Shafaq News in Iraq reported during the weekend that the Islamic State was preparing assaults from restive Anbar province, where it declared a caliphate some five years ago. Security forces told the news agency on Sunday that Islamic militants were carrying out attacks at night using “modern and sophisticated sniper weapons that the security services do not possess.” About an hour after acting US Defense Secretary Christopher announced troops would be coming home a few short days before Biden takes office, rockets struck the heavily-fortified Green Zone in Baghdad, leaving one child dead and other five Iraqi civilians injured. Iraq too, given its vast oil reserves and strategic location, is a key US interest that should not be squandered.

Last week, the Islamic State claimed responsibility for an attack on a natural gas pipeline running from Egypt to Israel. That may be retribution for the so-called Arab Pivot, a series of defense-related moves by Arab states to normalize relations with Israel. That move tacitly awards Israel for disruptive activity at home, where it’s established a stronger grip over Palestinian lands and may be seeking a similar move offshore with maritime border talks with Lebanon. There too the intersection between geopolitical issues and energy collide given the vast amount of natural gas in the Mediterranean. And it’s happened during a period of US distraction.

In OPEC circles, one of the beneficiaries of the Arab Pivot is the United Arab Emirates, which may receive the coveted F-35 stealth fighter jet from the United States in exchange for the move. Emboldened, the UAE last week hinted that it wasn’t too thrilled with the restraint agreement that in part has prevented a deep collapse in oil prices. Meanwhile, Abu Dhabi during the weekend announced a considerable upward revision to its petroleum reserves, adding a vast discovery of unconventional oil was relative to “the largest shale oil operations in North America.” The UAE reluctance over OPEC restraint must be soon through that light. The tiny Gulf nation has invested heavily in new production capacity. And as a low-cost producer, they’re eager to sell.

That puts it at odds with de facto OPEC leader Saudi Arabia, which holds significant influence over the oil economy with its cheap-to-produce barrels. President Trump relayed a narrative that he helped save the restraint agreement by making nice with Saudi Arabia and Russia. Saudi Arabia is now decidedly ridin’ with Biden, however, though we’ve still got a ways to go before Biden takes office. With Trump decidedly distracted, Saudi Arabia is free to pursue its own course. Does it have the mettle to suppress an OPEC uprising, or will the whole thing unravel and we enter the New Year in a price war again? Or is this just normal blather we’ve come to expect before big OPEC meetings?

With all the distraction from the United States, it’s easy to put China’s ascent on the back burner. For crude oil though, it’s the only game in town. And it’s set to be even more important as it’s on the cusp of taking the No. 1 spot from the United States in terms of refining. That could put an underlying premium in the price of oil for the foreseeable future. But the bullish news has competition. Most of the Purchasing Managers Indices coming out this week are expected to come in lower than previous readings. Consumer confidence looks lower for the United States. And the holiday travel that would otherwise support the price of oil and products will not be supportive this year. But the holidays will go on so it’s likely to be a relatively quiet week on the market front. We’re issuing an Orange alert for the week, expecting crude oil prices will move by at least +/- 3%.