Risk level: ORANGE - High

RED: Severe (+/- 4%) ORANGE: High (+/- 2%)  YELLOW: Elevated (+/- 1%)  BLUE: Guarded (+/- ½%)

THE BOOSTER SHOT

•             If Trump gets his way, there will be no spare capacity left in the oil market

•             U.S. energy circles are expressing concern about the fallout from trade policies

•             Libya could be down by about 800,000 barrels per day by the first week of July

We find ourselves confronted with a host of issues that are driving the price of oil potentially toward $100 per barrel in July. In the United States, a Trump administration determined to define a new American trajectory is facing an international community with a growing distaste for that vision. In trade alone, that vision is now met with frustration among domestic and foreign partners alike. Abroad, a zero-policy on Iran is having ripple effects across the global oil sphere. We now have three OPEC producers facing an uncertain future at a time when the market has little spare capacity to address those collective shocks. With OPEC+ commitments short of the expected deficit, and with the U.S. energy sector facing headwinds of its own, we found ourselves somewhat optimistic with a call of a 2 percent swing in the price for Brent crude oil last week. Brent finished the week up 5.1 percent, beyond our forecast range, to finish the week at $79.23 per barrel.

Welcome to the second half.

In its monthly market forecast, the International Energy Agency said OPEC members in the Middle East could churn out another 1.1 million barrels of oil per day in short order and more volumes could emerge from Russia to offset real shortages in Venezuela and potential shortages in Iran. Even if the producers with the spare capacity respond to fill the gap, the market would still be walking a fine line in the second half of the year.

U.S. President Donald Trump on Saturday said he spoke with his counterpart in Saudi Arabia, King Salman bin Abdulaziz al-Saud, about "turmoil and d[y]sfunction in Iran and Venezuela." Riyadh, he said, has agreed to pump out as much as 2 million bpd to offset the looming deficit from those two producers.

That would only fill in the Iranian vacuum called for by the U.S. State Department by November. And if Saudi Arabia agreed to that level, it would be agreeing to release the entire spare capacity held by Saudi Aramco, leaving no room for future shocks. On Thursday, U.N. Secretary-General António Guterres expressed concern about instability in the Libyan oil belt as authority over oil exports is under threat. By Saturday, the Libyan National Oil Corp. said it would declare force majeure on the ports of Zuetina and Hariga. That would lead to a loss of about 800,000 bpd from Libya, a figure that represents nearly its entire production capacity.

And let's not forget the dysfunction in the oil market that Trump mentioned is of American design. The president has pursued a policy of unilateralism while at the same time asking for face-saving favors. It was not too puzzling then to find U.S. Energy Secretary Rick Perry calling on Russia and Saudi Arabia to open the spigot rather than boast of the geopolitical gains from the Trump administration's pursuit of energy dominance.  With a call for help on Saturday, the president has shown that dominance remains out of reach.

Which brings us to trade. Texas Gov. Greg Abbott, a Republican, said in a letter to Trump that he feared tariffs on steel and aluminum imports would "threaten future economic growth both in our state and across the country." Already pressed with a lack of takeaway capacity, more expensive steel would lead to higher costs in the U.S. energy sector, which would be something of a self-inflicted economic wound. Revised figures for first quarter GDP turned lower and, while it is closer to Fed targets, inflation is accelerating faster than it has been in years. The unintended consequences of U.S. trade policy could push the rate of inflation even higher, to the detriment of the world's leading economy. On Sunday, the government of Canada, a legacy ally, will enact trade countermeasures "until the U.S. removes its trade restriction measures."

This is not a commentary on the Trump administration. Instead, it's an observation about the consequences disengagement. Writing in Foreign Affairs in 1958, former U.S. Secretary of State Dean Acheson warned that disengagement would leave a stain on the U.S. brand. Without engagement between the United States and the rest of the world, the U.S. position would weaken and become less desirable as a result. With U.S. appeal waning, it would be left to adversaries like Russia to fill the vacuum, he said. That's telling, particularly in context of Perry's appeal to the Kremlin. Crawling back to domestic shores under a policy of "America First," Acheson wrote, could lead to the end of U.S. influence on the global stage.

"For us, there is only one disengagement possible," he wrote. "The final one, the disengagement from life, which is death."

We anticipate some cashing in on Monday as the market digests the U.S. call for foreign oil. But it likely won't last given the loss of Libyan oil, and any unilateral action from Saudi Arabia would likely frustrate OPEC allies barely a week out of Vienna. Among other factors this week is the outcome of general elections in Mexico on Sunday. Trading could be muted somewhat with the U.S. federal holiday, but attention will remain high because of Thursday's release of the latest minutes from the U.S. Federal Reserve. On Friday, we get a glimpse at U.S. employment levels for June.

An $80 hit on Brent may be the tipping point for future direction. Given the obvious supply deficits and trade fallout, we're issuing another Orange alert for the week, expecting Brent to swing by plus or minus 2 percent. Should Libya avoid force majeure, or the Saudis come through quick with more oil, the rally should cool off. It could continue, however, should traders look beyond the paper barrels and take stock of the real lack of spare capacity.