Risk level: Yellow - Elevated

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

THE BOOSTER SHOT

•             There will be blood in the global trade war seen in the collateral damage

•             He who controls the coast controls the region. This matters for the Turkish pivot

•             Spending power in the world's leading economy is on the decline

President Trump last week opened a new front in the global trade war by turning his ire against NATO ally Turkey.  Steel trade from Turkey to the North American market could double to 50 percent, a target that's concerning for regional midstream bottlenecks. Meanwhile, the Chinese government has shown no signs of backing down in its reciprocal response to U.S. trade pressure. On the energy front, Beijing has taken a step further by committing to Iran.  The egos of nation states are overtaking concerns about constituent welfare. In the United States, the world's leading economy, an increase in consumer prices has largely wiped out any real wage gains. Globally, the International Energy Agency is warning of waning demand. All this has led to balance in the price of oil that's been hidden by daily volatility. Even with a 3 percent drop in Brent last week, the market was range bound and handed us our first miss in more than a month. We were right about volatility, but wrong about the end result with an Orange alert as Brent finished down a half percent to $72.81.

Trump on Friday lamented that U.S. relations with Turkey were "not good" and responded by doubling tariffs on aluminum and steel to 20 percent and 50 percent, respectively. Tensions between the two countries have been simmering since at least January when Turkish forces hit a U.S-allied Kurdish militia in Syria, suspected by Ankara of having ties with the militant PKK. But beneath the military tensions lie the fate of religious figures ensnared in Ankara's own political fractures. From a failed coup allegedly fomented from the United States in 2016, to Ankara's own political identity, Turkey is reflecting on its 60-year friendship with the West. Writing in The New York Times, Turkish President Recep Tayyip Erdogan accused Washington of consistently moving against Turkish interests.

"Unless the United States starts respecting Turkey’s sovereignty and proves that it understands the dangers that our nation faces, our partnership could be in jeopardy," he wrote.

The need of national leaders to save face in an era of political egos is hurting their respective constituents. The Turkish lira has been in a free fall and Erdogan last week called on the Turkish people to back it up by trading in gold and U.S. dollars for the national currency. For Trump, his hit on $1.2 billion in Turkish steel imports is compounding the woes for U.S. midstream companies faced with the lack of takeaway capacity. In the United States, companies like Plains All American and trade groups like the American Petroleum Institute, entities once considered part of Trump's base, are complaining about the rising costs for U.S. pipeline projects. Those costs could make it difficult for Trump to achieve has long sought after goal of broadcasting the political leverage of oil and natural gas overseas. If pipelines aren't reaching U.S. export terminals, the reach of energy, a proxy for power, is limited.

Erdogan warned that U.S. action against Turkey would weaken its influence overseas and convince Ankara that it's finally time to "look for other friends and allies." That search may ultimately end in the Kremlin, which been interested in extending its interest into the Balkans through Turkish territory for half a millennium. With the Ottoman Empire waning in the early 20^th century, it was Russian policy to take a patient approach to securing a geopolitical advantage by taking control of the Turkish Straits. Already influential in the Caucuses, a Turkish pivot would have deep ramifications in the political geography of global oil and gas pipelines. Turkey hosts the Baku-Tbilisi-Ceyhan oil, the second-longest pipeline in the world, connecting the capital of Azerbaijan to the Mediterranean Sea and the 600-mile Kirkuk–Ceyhan oil pipeline connecting the Kurdish north of Iraq to the Turkish coast. For gas, the European Union is keen on breaking Russia's grip on the energy sector with its Southern Gas Corridor that would connect Azerbaijan to Italy. Moscow, meanwhile, has its own gas objectives with its Turkish Stream project through the Black Sea. Erdogan's next move then could have profound consequences for global power. 

Turkey's neighbor, Iran, meanwhile, is in the midst of geopolitical repositioning in its own right. The remaining parties to the JCPOA – three European powers, Russia and China – are keen on keeping the deal alive. At stake in that agreement is about 1 million barrels of oil per day for a market with little tolerance for shock. On Saturday, China National Petroleum Corp. nudged French supermajor Total aside by increasing its stake in the development of the South Pars gas field in the Persian Gulf. That would give Beijing a strategic interest in what happens in one of the world's major oil chokepoints at a time when Tehran is flexing its military muscles in the Persian Gulf. If Iran's oil can't flow in November, the Iranian government has said, no one's will. With the South Pars agreement, China's voice in the Persian Gulf just got louder.

If control over coastlines is indicative of geopolitical leverage, the United States is losing power overseas to Russia and China. Strategic control is waning and friends are at a premium for the Trump administration to the detriment of strength through the economy. In its latest monthly market report, the International Energy Agency said it expected oil demand to increase slightly next year, but that was tempered by concerns about escalating trade disputes. Demand, its economists said, could cool down in the second half and into 2019. That voice of concern is getting louder as consumers see the price of everyday goods rise. In the United States, the Consumer Price Index increased year-on-year at its highest rate since 2011. That means U.S. wage growth, as well as the benefit of Trump's tax cuts, isn't enough to keep pace with inflation. Spending power in the world's leading economy is eroding.

Expect the trade war to escalate. There era of the political ego is reminiscent of the scene in Quentin Tarantino's Reservoir Dogs where criminal boss Joe Cabot is assigning pseudonyms to his gang of jewel thieves. Asked why they can't pick their names, Cabot says you get a room full of guys all fighting over who gets to be Mr. Black. Since nobody knows the other one, nobody wants to back down. We are witnessing a similar theme in trade disputes in that nobody wants to back down and it’s the components that make up the nation state that suffer.

This week starts off with a bang with OPEC releasing its monthly market report on Monday. That will be a telling indicator for trends throughout the week given the increased importance of EIA data. It was EIA data that pushed Brent down about 3 percent last week. On Friday, we'll get a look at U.S. consumer confidence with the latest University of Michigan survey. We're taking a lessons-learned approach for the week ahead and issuing a Yellow alert, expecting Brent to move by about 1 percent. Global trade tensions are causing collateral damage that could push the price of oil lower. OPEC's expectations of demand, meanwhile, could create tailwinds for Brent, though EIA data may be the determining factor in the week ahead.