We’re not out of the woods yet

Risk level: Red

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


-Demand destruction persists

-Beware the ghost of Trump

Crude oil prices rallied in herd-mentality fashion, supported by last week’s unilateral decision by Saudi Arabia to keep 1 million barrels of oil per day off the market. Brent crude oil is up a stunning 50% since Nov. 1, when early breakthroughs on a vaccine for the novel coronavirus responsible for the COVID-19 pandemic. The rally could seal its own fate, however, by stimulating U.S. shale oil production. But that will only do so much. President-elect Joe Biden has vowed to move forward with an ambitious green energy agenda, while at the same time limiting shale exploitation on federal lands. Though the United States will have to do some fundamental soul searching following last week’s insurrection, Biden can only do so much.

Saudi Arabia’s decision sent crude oil prices sharply higher last week due to its tacit indication of waning demand. The restraint could also eat into crude oil inventories and balance the market as OPEC intends. The price for Brent crude oil ended trading last week at $55.99 per barrel, a gain of 8% on the week.

Biden faces a tall order. The United States last week was shaken to its core by what can only be described as a cult of personality gone horribly wrong. Last week, the president and several members of his own party openly defied the very foundation of the United States by not only calling for the overturning of the will of the people, but inciting violence against their own government. Biden starting Jan. 21 needs to repair that damage.

President Donald Trump since venturing into politics has broadcast an America First agenda that through fascist tendencies sought to build up the nation largely through isolation. This was supported by the idea that years of a ruling political class dominated by the Bush and Clinton families was doing little for average Americans who saw their jobs move overseas in droves. The export of American ingenuity was a detriment to the nation was the rallying cry for Trump supporters. That rallying cry intersected neatly with the notion that geopolitics and energy collide. Presidents starting at least with Jimmy Carter in the 1970s saw national security run parallel with energy security. Under Trump, the United States moved closer to what some analysts and pundits saw as energy independence; the idea that the shale revolution would finally break the nation free from foreign influence.

While it’s true the United States is relying less on Middle East oil, it is not energy independent. U.S. crude oil imports from Saudi Arabia and Iraq have been at zero over recent weeks, a remarkable feat for a nation beholden to OPEC just a generation ago. But it has been, and will continue to be, Canada that is the dominant supplier of crude oil to the United States. The northern neighbor has sent an average of 3.4 million bpd to the United States over the last four weeks, compared with 97,000 bpd from Saudi Arabia. Two years ago, before the pandemic, Canada exported on average 3.8 million bpd to the United States, while Saudi Arabia sent just 270,000 bpd. Meanwhile, Saudi Arabian developments, exports or not, continue to influence not only U.S. politics but U.S. economics as well. U.S. markets, including commodities, do not exist in a vacuum.

A Biden push for more renewable energy, meanwhile, would expose the United States more to international events given its lack of rare earth elements needed for the battery technology that would usher in a green revolution. This could arguably be embraced by latent Trump supporters who will look fondly at the administration’s departure from the Paris climate accord as supportive. The United States has few of these minerals to exploit and remains overwhelmingly dependent on China. That will require some deft diplomacy for Biden, who must broker a truce in the trade war while at the same time avoiding a lopsided relationship that puts the United States at a disadvantage.

Both, however, show that independence is a myth. A tit needs a tat and progress cannot move forward without a corresponding factor to overcome. Evolution requires reciprocity. In a dialectic developed by the German philosopher Hegel, a thesis encounters an antithesis, those two elements clash and yield the synthesis of something new. If either the thesis or the antithesis are absent, there can be no progress. In the waning months of the Trump administration, much ink has been spilled over the liberal world order. While it may be true that globalization helped marginalize some segments of the working class, that may be more about a failure to catch up than faults inherent in the system. Robert Keohane, one of the foremost scholars on liberalism, has said that the gains of cooperation are larger relative to the alternative of conflict. Case in point would be steel tariffs used in Trump’s trade wars. The United States does make manufacture the type of steel used to make the pipelines that could help with energy dominance. Cooperation, not conflict, yields better results.

The rally in crude oil prices will be tested this week by reports from OPEC and the IEA, which are widely expected to lower their demand forecasts because of the lingering pandemic. Saudi restraint will offset that somewhat, but only so much. We continue to expect President Trump will move forward with his rogue behavior unless he’s removed from office against his will. Elsewhere, we’ll see how well vaccinations against COVID-19 move progress and how long the uptick in new cases will continue. We were decidedly perplexed by last week’s rally, but wonder if it was something of a geopolitical risk premium given the developments in the United States. Things could get worse before they get better, so we’re issuing a Red alert, anticipating crude oil prices will move by at least plus or minus 4% on the week.


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