Figure 1 from: International Studies Quarterly (1983) 27, 419-441 War and Power Dynamics: Economic Underpinnings CHARLES F. DORAN Johns Hopkins University

 

Risk level: Blue - Guarded

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

 

We continue to see moderation ahead for the price of crude oil as traders take a wait-and-see approach ahead of the May 12 deadline for a U.S. decision on the Iranian nuclear deal. The price for Brent should stick within its current range. We were overly aggressive last week with our Yellow Alert as Brent ended the week down by about a half percent at $74.42 per barrel.

It's earnings season. Results were more or less mixed, with Exxon Mobil disappointing after posting solid gains in the fourth quarter with help from the U.S. tax reform. Chevron, meanwhile, saw share prices jump 0.9 percent to $126.62 after upstream earnings more than doubled from last year to $3.35 billion.  But it was French supermajor Total that offered one of the better peaks at market sentiment when it took notice of an environment that "remains nevertheless volatile with persistent uncertainty."

On Tuesday, British energy company BP publishes its quarterly earnings and markets are certain to move on comments from CEO Bob Dudley. The supermajor is already coming out of one of its strongest quarters in years, but Dudley's mind has been on the future. Speaking last week in London, the CEO said the shifting energy landscape meant oil will fade from the global energy mix.

"At some point oil will stop growing," he said. "But the pace of any subsequent decline is likely to be very slow, with the world needing a lot of oil for a long time to come."

Which brings us to the esteemed John Kemp. Citing Stein's Law -- If something cannot continue forever, it will stop – the Reuters oracle said the market is on an "unsustainable course," with no cushion for risk and few new sources of supply to meet the expected swell in demand during the summer. That could spell trouble ahead. Already, President Trump has suggested that oil prices may be too high, an indication he may be growing sensitive to consumer strains. That's becoming apparent as the U.S. economy grew at its slowest pace in a year in part because of lower consumer spending. That could be an indication of emerging demand trends and, from Kemp, "the higher prices rise and the longer they are expected to stay high, the bigger the eventual response from oil consumers."

Last week saw some of the geopolitical risk premium fade in response to historic handshakes on the Korean peninsula. Speaking on the thaw, U.S. Vice President Mike Pence said it was a small step that was big on talk, but short on action. Any move by North Korean leader Kim Jong Un, he said, "will be met with reservation, vigilance, and verification." And with the May 12 decision on Iran, reservation may be the operative word given doubts cast over the Joint Comprehensive Plan of Action. Why deal with North Korea on nuclear issues if the Trump administration is willing to walk away from the JCPOA? If Kemp is right, there may be an economic pitfall ahead as consumers shrink away from the higher oil prices that are likely to come.

With its balancing act, OPEC may now be caught in a pickle. Oil prices may be stuck now, but start to spike in the second week of May in anticipation of Trump's next move. Though OPEC leaders are adamant that they're not it in for the price, there may be a looming game of chicken as the price curve points to a moment where over- or under-steering could leave the market in the ditch.