The GERM Report

Risk level: Orange

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

THE BOOSTER SHOT

-Has Iran had enough?

-Is Trump’s foreign policy about Trump or about Biden?

Developments on a vaccine for COVID-19 and strong demand on the product side helped push crude oil prices higher last week. Road travel in the United States over the long holiday weekend was suppressed, but the increase in package deliveries is eating into the glut for diesel. A decline in the value of the U.S. dollar, which hit a three-month low on Friday, is adding to the premium. But on geopolitics, we highly suspect the sabre rattling between Iran and Israel will escalate, adding a premium to oil if the situation escalates.

We noticed a trade pattern develop around Nov. 13 that suggested a breakout of some sorts was likely, coming after a long period of static prices. For U.S. crude, that pattern was followed by a major spike, with WTI up some 13% over the course of two weeks. The pull from the products side helped Brent rally as well, prompting talk of $50 oil emerging on the horizon. On the week, Brent was up some 6.5% to finish trading Friday at $48.18 per barrel.

Preliminary data show holiday shopping in the United States was somewhat muted by the pandemic. In-store traffic on the day after Thanksgiving was down 52% year-on-year. But people were still shopping. Adobe Analytics estimated retail shopping online came it around $9 billion on Black Friday, up 21.6% from the same period last year. Today is dubbed Cyber Monday and retail therapy could make this the biggest in single-day sales in history. All those packages need to be delivered. Add to that the prospects of mass shipment of COVID-19 vaccines and we would expect to see strains on demand start to emerge. Analysis from Reuters oracle John Kemp finds the glut in diesel is “mostly gone,” and we noted last week that it was products that were keeping the market alive.

That should set us up for another strong week in crude. That strength will be supported by heightened geopolitical tensions in the Middle East that developed after the suspected Israel slaying of Iranian nuclear scientist Mohsen Fakhrizadeh on Friday. This is the second high-profile assassination of a key Iranian figure after U.S. forces killed military commander Qassem Soleimani in January. Iran’s immediate response to that was muted, though we wonder if the tendency of the Islamic republic to play the long game masks some of its tactics. After the assassination of Fakhrizadeh, however, Iran has been more explicit. The hard-line Iranian student newspaper Kayhan during the weekend called for an attack on the Israeli port city of Haifa if it was found that Israeli agents indeed killed the nuclear scientist. That strike, Kayhan argued in an op-ed on Monday, should also cause “heavy human casualties.”

We’ve commented for much of the year that the Trump administration’s policy on Iran seems to be one of goading. Since walking away from the multilateral nuclear agreement that saw Iran step away from its overt nuclear ambitions, the Trump White House has routinely poked Iran with a stick of sanctions and targeted assassinations. If Iran were to lash out, it would back the administration’s rhetoric that Iran is a bad actor and the White House would have reason to retaliate openly. If Iran does nothing, it will continue to get harassed, though patience is a virtue. After it was revealed that Trump was considering war with Iran during his final days in office, Iran reacted by deploying a heavy gunship and smaller fast-attack boats off its western waters, among the busiest shipping channels in the world. The United States too is ratcheting up the pressure with the deployment of the USS Nimitz in the Persian Gulf. Iran, meanwhile, said its strategic interests were not tied to “a specific geographical area.” And Hezbollah, to make the point, said it stood by Tehran in its response to the assassination of Fakhrizadeh.

Iran’s navy is depleted and Hezbollah cannot defeat Israel alone. That leaves softer targets and reciprocal assassinations as the likely options. Iran in the past has shown its capable of pin-prick attacks in the Persian Gulf that can drive the price of oil higher and clog the narrow shipping lane with military support vessels. One third of the world’s oil flows through that narrow shipping lane and Iran can strike at a moment of its choosing and disrupt and already fragile economic recovery. From the air, it has shown it can devastate oil infrastructure in the mighty Saudi Arabia, starving the global economy of oil and leading to massive spikes on the market.

“A well-targeted strike can be crippling,” Amy Myers Jaffe wrote for the Council on Foreign Relations.

Iran, she added, is perfectly capable of holding the oil market hostage.

She wrote that last year.

During the so-called tanker wars that coincided with the near-decade long battle between Iran and Iraq in the 1980s, some 60 percent of the vessels attacked were oil tankers. Shipping was severely impacted, causing major spikes in the price of oil and at the pump. It’s in nobody’s interest to take action that would restrain movement through the Persian Gulf, but Iran has shown its ability to sting and sting hard. Perhaps that’s what Trump wants for his last days in office; a raison d’être.

In a scathing critique of Trump’s foreign policy, Gregory Johnson at the Brookings Institution makes parallel arguments on the stance on the Houthi rebel group. In what could be seen as an overarching case for diplomacy, Johnson notes that designating the Houthis as a terrorist organization would be bad for peace and bad for U.S. national security given that such as designation does nothing to incentivize the group to lay down arms.

“It would also box-in President-Elect Biden before he even takes the oath of office, although perhaps that’s part of the attraction for exiting Trump officials,” Johnson wrote.

Similar comments could be made about U.S. policy on Iran.

OPEC ministers met Monday to review curtailments just as Brent crude oil prices flirt with $50 per barrel. Product demand aside, however, a broad-based economic recovery is unlikely until a COVID-19 vaccine is in wide distribution. Holiday sales in the United States could support the market as a whole in the first few days of the week. There’s a string of GDP readings out for European economies early in the week, but we wonder how much of an impact the expected downturn in manufacturing in some major economies will have on the mood. Federal reserve officials from the United States take the podium and we’ll get a close up view of oil and product inventories mid-week. We expect the Trump administration to continue rattling the cage, however, and see narrative more than fundamentals moving the needle this week. That said, we look to Stein’s law – If something cannot go on forever, it will stop – and call for a correction, just not this week. We’re sticking with our Orange alert, thinking crude oil prices will move by at least +/- 3 percent on the week.