Risk level: ORANGE - High

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

THE BOOSTER SHOT

•             Be mindful of social media and trade talk ahead of next week's Juncker-Trump meeting

•             Schlumberger warned that infrastructure issues could throttle U.S. production

•             Like the dizzying U.S. walkbacking, expect more oil price volatility ahead

U.S. executive direction was questioned this week after the president seemingly backed the leader of the authoritative example of an adversary over his own officials. Since Monday's meeting in Helsinki – as with the fluid narratives coming from the White House – the movement for the price of oil has been dizzying. We moved this week, albeit briefly, away from concerns about the lack of spare capacity toward indications of building non-OPEC supplies. But it was a Thursday bombshell from Saudi Arabia that it would not put oil on the market that wasn't needed that brought supply-side concerns back the market's mind. Against all this is trade. Last week, Europe took its own measures to safeguard its steel industry. On the other side of the pond, upstream wondered if pipeline bottlenecks would lead to production constraints. President Trump meets this week with a European counterpart who's done little to hide his frustration with American leadership. Surprises are no longer surprising, but with Trump not shy about punching hard on trade, we continue to expect heightened volatility for the price of oil in the week ahead. We may need to revisit our scale given recent swings, but were again more or less within range with last week's Orange alert, with Brent falling 3 percent for the week ending July 20, the third week in a row for a similar movement, to close at $73.02 per barrel.

In damage control reminiscent of the Clinton era, we are forced to ask what our definition of "would" would be when it comes to Trump's compass needle. Behind closed doors in Helsinki, we are forced to ask even deeper questions given the possibility that the U.S. president suggested former Russian Ambassador Michael McFaul could be turned over for Russian interrogation. While Trump may believe that he's taken the necessary political risk for the sake of détente, his style of off-the-cuff diplomacy leaves his messaging open to interrogation as well. For the oil markets, Russian President Putin said neither side wanted anything other than a goldilocks price that would protect producers and consumers alike. Both sides, he added, could work together on the markets. But as we noted last week, it's Russia that has a seat at the OPEC table, not the U.S. president. And perhaps Trump recognized that to some extent when he acknowledged that, on energy matters, Russia may have "a little advantage locationally."

 

With articulation on Russian policies unclear, we're left questioning policy in general. On Friday, Schlumberger Chairman and CEO Paal Kibsgaard said the lack of pipeline capacity in the Permian shale basin could eventually throttle production. Permian production by August could hit 3.4 million barrels per day, though without Commerce Department concessions on steel tariffs, that could be a negative for the price of oil considering the pipeline bottlenecks. Mostly foreign manufactures make steel pipe. On Friday, meanwhile, the Dallas Fed said it expected its regional job growth to be at 3 percent this year, down from its 3.3 forecast from last month.

Earlier this week, the European trade commissioner introduced safeguards on steel out of concern about the redirection in trade flows because of U.S. sanctions on metals. Trade will be on the agenda on Wednesday when European President Jean-Claude Juncker meets with Trump before delivering a speech at the Center for Strategic and International Studies. Juncker in the past has show frustration with the U.S. president, calling for clarity on his stance on NATO and on climate change.

Speaking during the signing of a trade partnership agreement with Japan, the European president spoke of the benefits of interconnectivity by saying there is "no protection in protectionism and there cannot be unity when there is unilateralism." Two days later, European Trade Commissioner Cecilia Malmström, remarking on the 70 years since the launch of the Marshall Plan, said the United States and Europe are better together than apart because divisions would weaken both powers.

"We need to unite," she said. "Trade would be the obvious place to start."

Hans Morgenthau in his seminal Power Among Nations said a nation will either seek to keep, increase or demonstrate power. Keeping power means adherence to the status quo, increasing power means pursuing a path of imperialism, while demonstrating power comes from prestige. We must ask ourselves which of those the Trump administration is displaying, if any.

Total U.S. oil production has topped 11 million bpd for the first time ever, giving this administration the tools to achieve a level of energy dominance. But the pursuit of that objective rests in trade policies that are conducive to growth. Schlumberger's Kibsgaard said market fundamentals are working in its favor as supplies move closer to demand. Further out, spare capacity – the buzzword du jour – is at a premium, meaning more spending is needed to keep pace with increasing demand.  Nevertheless, capital spending for the world's largest oilfield services company, in the very industry hammered by declining oil prices, was left the same as levels from 2016 and 2017.

Given Trump's frustration with the optics of the Helsinki meeting, the coming meeting with Juncker deserves close attention. The Trump administration is eager to loosen the belt of Russian influence in the European energy market, but recognizes the Kremlin has "a little advantage." Europe's safeguards on steel show trade patterns are shifting and it's only a matter of time before that shift starts to permeate deeper in the global energy space.

Elsewhere on the trade radar, we would expect a reciprocal backlash next week from China on the latest remarks from the U.S. president. On Tuesday, pay attention as U.S. Sen. Lisa Murkowski chairs a hearing on factors impacting global crude oil prices. Scheduled to testify is the Center on Energy Policy's Jason Bordoff, who wrote in Foreign Policy last month that oil is a "geopolitical vulnerability" for the United States and its energy dominance has been "overhyped." On Friday, we get a glimpse at U.S. GDP. And, of course, mind the curve.

We're going Orange again this week, with continued volatility likely, especially given the importance of potential gaffes from the Juncker meeting and Friday's GDP. We're still keeping Libya and Iraq in the back of our mind, and Trump's recent string interviews and tweets have been market movers. Any developments in the Middle East or labor issues in the North Sea would be supportive of Brent, while evolving trade tensions would create headwinds in the week ahead.