Risk level: YELLOW - ELEVATED

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

THE BOOSTER SHOT

•             A busy week in earnings could offer clues about market direction

•             Pay attention to what Bob Dudley says about the billion dollar spend on shale

•             We're starting to wonder if the Syrian crisis is looking a little bit like pre-WWI Balkans

The chairman of the U.S. Senate Foreign Relations Committee, a Republican, openly questioned whether or not the Trump administration has a clear direction on foreign policy. That shows the fallout from Helsinki continues to influence the U.S. president's determination to do things his way. Meeting with European Commission President Jean-Claude Juncker this week, President Trump took a sharp turn on trade, pushing this time for a zero-barrier trans-Atlantic policy. That coincided with a promise of a $12 billion aid package to a U.S. agricultural sector reeling from Trump's pressure on foreign trade, a telling indication of the real-world consequences of his policies. Meanwhile, earnings season for an energy sector facing its own tariff woes were a disappointment, with U.S. supermajors Chevron and ExxonMobil offering lackluster results. On Tuesday, we'll hear from BP after it plopped down billions of dollars to take U.S. shale assets off the hands of BHP Billiton. BP CEO Bob Dudley is a market mover, but as we move into a typically slow August, we're thinking that volatility may start to cool off. We were more or less on par given our scale with an Orange alert last week as Brent gained about 1.7 percent to close out the week at $74.29 per barrel. That's four weeks in a row for an accurate call.

After Tehran said it was unimpressed with his latest outburst, crude oil prices barely moved in response to President Trump's all-caps warning this week. Stressing the obvious, Iranian President Hassan Rouhani said during a Cabinet session it's been policy to stand up to the United States since the inception of the Islamic republic. Suzanne Maloney of the Brookings Institute said Tehran wasn't biting on Trump's bait, though both sides in their current iteration may be too stubborn to stand down. Meanwhile, U.S. officials have implied support for regime change in Iran by tolerating the Mujahedin-e Khalq, a cultish group once included on the U.S. terrorist list. For now, however, the Iranian issue seems to be at a standstill and the lack of major swings in the price of Brent crude oil is indicative of the emerging risk tolerance. On Friday, the Central Bank of Russia said it was keeping its key lending rate static an annual 7.25 percent, noting inflation was in check and volatility in the price of oil was unchanged from earlier this year.

"These risks remain moderate," it said.

We're coming off a month where Russian leverage remains a headline issue for the United States. On Friday, the U.S. president went on the defensive after CNN reported that his former lawyer and self-professed "fixer" Michael Cohen may tell Robert Mueller's investigative team that Trump knew of a controversial meeting in 2016 at the Trump Tower in New York where Russians offered damning information on Hillary Clinton. The administration postponed a questionable invitation to Russian President Vladimir Putin to the White House, but said Trump would be open to a trip to Moscow at the Russian president's invitation. With the Helsinki double-negative still fresh, these issues could have a lingering impact on investor confidence. While grilling Secretary of State Mike Pompeo this week, U.S. Sen. Bob Corker, R-Tenn., the chairman of the Senate Foreign Relations Committee, said there were serious doubts about U.S. foreign policy and Trump's behavior in general, which if one follows his line of questioning, suggests he's wondering if Trump himself is undermining U.S. confidence.

"Is there a strategy to this?" he asked. "Or is it — what is it that causes the president to purposely, purposely create distrust in these institutions and what we’re doing?"

Forced to search for new foreign policy roles, a nation state struggling with direction will feel threatened and more likely to over-react. Transitions like this are not only inherently risky, but difficult to manage. The notion that diplomacy means keeping your friends close and your enemies closer, meanwhile, applies to Iran as much as it does to Russia.

"You come before a group of senators today who are filled with serious doubts about this White House and its conduct with American foreign policy," Corker told the secretary of state.

A change in a state's status of power influences its ability to extend leadership over the horizon.

As a nation gains in power relative to others, its capacity to exercise leadership grows; as it falls behind, the capacity – or willingness - to influence international politics wanes. On Monday, it will be Russia that hosts a high-level meeting on the simmering conflict in Syria. In attendance will be the deputy foreign ministers of Iran and Turkey, two recent targets of Trump's rage. The Russian Foreign Ministry said Washington hasn't upheld its end of the Syrian bargain by making room for a buffer zone along the Israeli border. This week, Israel launched Patriot missiles at Syrian targets and the situation, dragging on since the Arab Spring movements, could re-emerge as a geopolitical stress point.

Conflict creates tensions in the market by way of supply shocks, inflation triggered by an increase in government spending on fighting wars and leads to a general sense of trepidation. The price for Brent crude oil moved more than 10 percent in the opening salvos of the U.S.-led invasion of Iraq in 2003. While the Syrian crisis may be factored in already, any further escalation will likely unsettle broader markets. Wars are not only major market factors, but as World War II reminds us, they also settle who's in charge.

In the economy, a 4.1 percent increase in U.S. GDP for the second quarter did nothing to support the price of crude oil. President Trump said the growth rate was "very sustainable," but the market indicated that narrative was questionable. Most of the gains could be attributed to one-off factors like financiers moving ahead of tariffs. For consumers watching the price at the pump, disposable personal income in the second quarter increased 4.5 percent, against the 7 percent increase in the first quarter. There were also decelerations in wages and salaries.

It's earnings season, meanwhile. On Friday, U.S. supermajors Chevron and Exxon Mobil disappointed with weaker-than-expected returns for the second quarter. On Tuesday, we hear from BP CEO Bob Dudley, who gave us the lower-for-longer mantra to drive us through the market downturn a few short years ago. BP's second quarter earnings report follow one of the company's biggest spends in history – a multibillion deal for BHP Billiton's U.S. shale portfolio. That bet might be problematic as the U.S. energy sector faces headwinds because of tariffs. Dudley, however, is to energy what E.F. Hutton is to stocks – when he talks, people listen.

There are more factors than just geopolitical and energy issues in the week ahead. On Tuesday, the Bank of Japan issues its outlook report and China publishes its composite PMI. Europe, meanwhile, publishes its figures for second quarter GPD the same day. U.S. rate decisions are expected from the Fed. And pay attention Thursday when Barclays and Goldman Sachs issue their reports for the second quarter. By Friday, we'll get a look at July unemployment in the United States.

It could be another bumpy ride next week, though we do expect the market to look a little range bound and are taking a cue from the Central Bank of Russia. We're issuing a Yellow alert for this week, expecting crude oil prices to move by about 1 percent. Crude oil prices would likely go up should Asian indicators reveal optimism, or lower if there's a sense of lingering economic concern in second quarter earnings.

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.

Risk level: ORANGE - High

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

THE BOOSTER SHOT

•             Watch your Twitter feeds to see if Trump stirs the economic or geopolitical pot

•             Libyan instability resurfaced during the weekend, while Iraqi unrest is concerning

•             Keep calm and mind the trade war

The big headline moving into the third week of July is Monday's meeting between the Russian and U.S. presidents, a meeting overshadowed by the recent U.S. indictment of 12 Russian intelligence officers. The Helsinki meeting could offer the Kremlin a chance to showcase its position of strength, not only because of President Putin's KGB background, but also because of its growing energy influence in the European gas market and its seat at the OPEC table. Beneath the headlines, however, remains uncertainty about the state of affairs in Libya. It was the lifting of force majeure on Wednesday that helped sink the price for Brent crude oil 6 percentage points. A short few days later and security fears escalated once again when staff members at the Sharara oil field were abducted. We've learned so far there is no room for risk in an ever-tightening market. In a testament to increased volatility, we erred a bit on the side of caution with last week's Orange alert, with Brent falling 2.9 percent for the week ending July 13. That's the second week in a row for a similar decline. We expect that volatility to continue.

Deputy U.S. Attorney General Rod Rosenstein dropped a bombshell on Friday by charging Russian intelligence officers with hacking into Democratic computer networks in the waning months of the last election cycle. With Rosenstein calling for a united front against foreign interference, the indictments did little to heal U.S. political wounds. The president took to Twitter to deflect blame toward his predecessor, falsely, for not raising the issue of Russian meddling. Democrats, meanwhile, said the meeting with Russian President Vladimir Putin should be cancelled in light of the latest findings.

One of the aspects of interdependent relations in the global system is the drawing near of adversaries. A Hezbollah with a stake in the Lebanese political game, for example, is less likely to act out than if it were isolated. For Russia, Mikhail Gorbachev united socialism with democracy under perestroika in the waning years of the Soviet Union. A post-Soviet involvement in the G8 later tied the Russian economy closely to the rest of the world. For President Trump, cooperation may be his way of containing Russia. The administration may see leverage in addressing concerns about Russia's grip in the European energy sector through the Nord Stream gas pipeline to Germany with Putin at the table. For oil, with Trump concerned about the domestic fallout over higher gasoline prices, pressing for market stability may be easier on friendly terms.

But this is not Gorbachev's Russia -- it's Putin's. What the fallout from the Russia indictments tells us is that Putin's Russia is deft at pulling strings and dividing U.S. politicians. It's Russia that's seated next to Saudi Arabia at an OPEC steering committee, not the U.S. president. For Trump, then, market stability depends on a certain degree of appeasement. In gas, Germany's support for the Nord Stream pipeline, in defiance of Trump, runs deep through the post-World War II geopolitical narrative. Though U.S. oil continues to flow through the global market, the optical era of global affairs may leave Trump facing energy security headwinds.

Elsewhere, there are lingering security concerns for some of OPEC's largest producers. On Saturday, the Libyan National Oil Corp. said armed assailants kidnapped four workers at the Sharara oil field, but later released two of them. Operations at the facility were shutdown, all workers were evacuated and production was cut by 160,000 barrels per day. Libyan security challenges were net positive for the price of Brent during early July, though a brief halt in the violence sparked a sharp correction on Wednesday. Clashes in June left some of the storage tankers at the Ras Lanuf terminal heavily damaged and facing a long repair timeline. Weekend security issues, meanwhile, show it may be a long time before Libya returns to its 1 million bpd capacity.

Digging deeper beneath the ever-present Trump headlines reveals brewing unrest in the oil-rich southern Iraqi province of Basra. It's from here that most of the oil from OPEC's second-largest producer flows. The Iraqi Oil Ministry said total exports for the first half of the year were up 5 percent from last year. Frustrated residents in Basra, however, have blocked access to the port of Umm Qasr in a possible sign of emerging Iraqi bottlenecks. That would only heighten the frustration in Iraq as it works to form a coalition government after the bloc led by influential Shiite cleric Moqtada Sadr won in May parliamentary elections.

And let's not forget about the implications of global trade tensions. Chevron and Royal Dutch Shell secured relief from tariffs on steel imports last week. Those tariffs are complicating the strain on pipeline capacity in the United States as production trends pick up. The Baker Hughes rig count for the United States is increasing, albeit at a slow and steady pace, so the U.S. industry's pleas for relief remain something to watch.

We anticipate a jump in crude oil prices Monday in response to the latest unrest in Libya. On Friday, The Wall Street Journal reported the Trump administration may be considering a release from the Strategic Petroleum reserve as part of its strategy to get more oil on the market. The lack of spare capacity is concerning and turmoil in the Middle East only complicates the matter. Times are lean on the supply side of the oil market, though there are indications the global economy is starting to cool off and ease demand.

On Tuesday, we have U.S. Fed Chair Powell testifying before a Senate panel. Wednesday offers a glimpse of British inflation at the height of Brexit complications. While the Trump-Putin summit, whether it actually takes place of not, will dominate the headlines for the week, we're monitoring instability in Iraq and Libya. But keep your eyes on your Twitter feeds to see if Trump stirs the economic or geopolitical pot over the next 48 hours and into the week. We're sticking with an Orange alert, expecting the price for Brent crude oil to exhibit more volatility in the week ahead. Middle East issues would push oil prices higher for the week, while any concessions from major producers would have a negative impact on the price for Brent.

Risk level: ORANGE - High

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

THE BOOSTER SHOT

•             The trade shot heard around the world could be negative for crude oil prices

•             Iran says it may choke off the Straits of Hormuz if it's backed into the corner

•             Libyan warnings of an economic domino-effect remain an underlying market factor

The foreign appetite for U.S. President Donald Trump's brand of politicking will be put to the test this week as he embarks on a tour of Europe. It was China on the radar, however, on Friday when the Trump administration fired more economic shots at its main economic competitor. Growing fears of a no-win war could dampen the momentum for economic growth going forward, as realized by the weaker opening for Brent crude oil on Friday. Given the president's ability to maneuver the narrative, any downturn in the price of oil from trade tensions could be used to support his claim that he's pulling the strings at OPEC. We'll find out this week when OPEC economists publish their first monthly market report since June's agreement to ease compliance with agreed production cuts. Europe, meanwhile, is working to salvage an Iranian deal abandoned by the president, whose decision to back out added a supply-side risk premium to the price of oil. Spare capacity is a looming fear, though the impact of protectionist trade policies could balance that out to prevent overheating. We were more or less on par with an Orange alert last week, with Brent ending the week down 2.9 percent to finish out at $77.13 per barrel.

Just after midnight in Washington D.C. on Friday, U.S. President Donald Trump signed off on 25 percent tariffs on Chinese goods worth an estimated $34 billion. China fired back almost immediately with a tit-for-tat move in response to what China's Ministry of Commerce said was the U.S. start of the largest trade war in economic history.

We are well aware at this point of the dangers of global trade war. There are no winners, even if, as the U.S. president has said, they're easy to win. In minutes from June meetings, the U.S. Federal Reserve struck an optimistic tone for growth in the world's largest economy and Friday's job figures added support to that outlook. Underneath the veneer, however, were concerns about the adverse effect of tariffs.

"Contacts in the steel and aluminum industries expected higher prices as a result of the tariffs on these products but had not planned any new investments to increase capacity," the meetings read.

That could limit the takeaway capacity in the U.S. energy sector and erode some of the gains the White House expects in the domestic market by reacting to what it sees as a long history of lopsided trade policies. Testifying before the U.S. House of Representatives in late June, Robin Rorick of the American Petroleum Institute said the U.S. energy sector will need $1.3 trillion in investments through 2035. Additional costs by way of tariffs could stifle investor confidence in the southern oil belts that support the president, and the FOMC minutes support that despondency. At a rally in Montana last week, the president was still cheered for his policies because, according to him, "we have all the cards." China has more cards to play of its own by way of a potential 25 percent tariff on imported U.S. crude, hitting a U.S. energy sector already pressured by tariffs on imported aluminum and steel.

What appears to be the truth and what's actually the truth are at odds in a political cycle where optics matter. Those optics will be viewed through a different lens when the president heads this week to the European continent. Waiting for him in London will be tens of thousands of protesters and a Europe growing weary of Trump's diplomatic style, which generated mixed results at best from the latest outreach with North Korea. On Friday, British leaders joined those from France, Germany, China and Russia at the table for a review of the U.N.-nuclear agreement unsigned by Trump in May. With some sanctions snapping back by August, the remaining parties to the agreement appear steadfast in their support. Expressing deep regret for U.S. action, the joint commission for the JCPOA said from Vienna the continuation of the flow of Iranian oil was part of the agreement and something they vowed to maintain. Whether or not that support can hold past November, when oil-related sanctions enter into force, remains to be seen. But U.S. considerations of case-by-case scenarios for Iranian oil customers, as well as Indian and Turkish insistence that they're protected from unilateral sanctions, suggests there may be some room to maneuver.

Perhaps it's indicative of the diplomatic challenges in broader terms for the Trump administration that, during 2015 negotiations for the JCPOA, hawkish former U.S. Secretaries of State Henry Kissinger and George P. Schultz wrote in The Wall Street Journal that re-imposing sanctions on Iran would not be automatic.

"Restoring the most effective sanctions will require coordinated international action," they wrote.

Meanwhile, Iran said it may take military action to disrupt the flow of oil through the Straits of Hormuz if its exports are blocked. If Iran can't export oil, Tehran seems to be saying, than it will be tough for others to do so as well. If Iran remains in the picture, the concerns about the lack of spare capacity would not be so great. If it doesn't stay in the game, geopolitical tensions will likely escalate by early 2019.

There remains, meanwhile, the Libyan wild card. Oil loading is suspended, but reports last week offered a sweeping range of figures for what the country was producing. All indications, however, are that Libyan production is well below recent peaks of around 1 million barrels per day. Mustafa Sanalla, the head of the U.N-backed National Oil Corp., met last week with Western diplomats to drum up support for an oil sector under threat from competing claims of authority. If Libya's economy falters, he warned, there may be a domino-effect across north Africa. While Libyan woes are nothing new, a further escalation here could add a significant risk premium to the price of oil.

We anticipate a bit of a slip in the price of oil on Monday as the market takes stock of the weekly gain in North American rig counts. We wouldn’t expect too much early-week movement, however, given the anticipation building ahead of the June market report from OPEC.  Tuesday will likely set the market headed in one direction or the other after the U.S. Energy Information Administration issues its monthly report. It raised its 2019 forecast for Brent by $2 per barrel in its last report. Direction will be tested again on Thursday with the release of the U.S. Consumer Price Index, especially given recent concerns about the cost of consumer fuels, and the release of The International Energy Agency's monthly report.

We're expecting concerns about the fallout of a Sino-U.S. trade war, which could lead to declining confidence in the overall economy, to dominate the front-end of the week. Recent talk of $100+ barrel aside, the immediate stage may be set for a search for a new course. Given the obvious impact of the EIA, OPEC, and IEA reports, we're expecting another volatile week for the price of crude oil and issuing an Orange alert. Brent could swing lower if monthly market reporting takes note of the headwinds from trade, or pump up on expectations of dwindling supplies in the second half of the year.