Prepare for a Violent Storm When Things Get Eerily Calm
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Prepare for a Violent Storm When Things Get Eerily Calm

by | published May 17th, 2019

Today’s geopolitical situation has been bringing to mind the eerie quiet before a tornado hits.

People stop what they’re doing and everyone’s face looks up to watch the sky turn green…

A deadly silence kicks up as animals flee for cover…

Air pressure suddenly changes…

And it seems like you’re suddenly all alone in the world.

This happens right before the deafening sound of a train barreling towards you that means that you’d better get to a shelter before you’re swept away.

Well, these days, we’re in the calm before a very different kind of storm.

The three global crises having the most direct impact on the energy sector are all barreling to the end of this week at almost full throttle…

Our Top Three Geopolitical Concerns Are Heating Up

First, the situation in the Persian Gulf is again hearing up, as the U.S. moves toward a military buildup against a truculent Iran.

This is developing into a classic case of a misread possibly starting a war.

Then, there is the simmering U.S.-China trade battle in which Trump has indicated he may raise tariffs on all imports from China.

At the same time, Beijing has countered with two ominous moves – cutting U.S. debt owned by China to the lowest levels in decades while for the first time applying significant fees on the importing of U.S. liquefied natural gas (LNG).

The former is likely to result in some foreign exchange volatility for China (since the U.S. debt often serves as an underpinning of collateral available to the government). The latter will translate into higher domestic energy costs, a problem that will become more acute if this geopolitical tit-for-tat is still around in September (when winter consignments need to be locked down).

Pundits are already rolling out perceived economic slowdowns in both countries (a wasted exercise at this early juncture since tangible indications pointing in that direction take at least three months to develop) and then translating such furtive attempts into lower aggregate energy demand.

Chinese missiles are no match for this checkmate move…
Right now, China has enough carrier missiles to wipe out every U.S. carrier strike group on the planet – and this shocking satellite footage proves they’re more hostile than ever. But while they’ve been playing checkers, we’ve been playing chess… and it’s about to be checkmate. You see, behind the scenes, the Pentagon has been secretly funneling billions into a top-secret technology capable of completely annihilating this threat. This is nothing short of a defense renaissance. Which side will you be on?

And last, but certainly not least, there is the meltdown in Venezuela.

Of the three, this one has taken a backseat over the past week.

It was center stage when crowds were facing off against the military. But a profound eleventh-hour pull back of full support from Washington left protestors in the streets of Caracas with no fallback. The situation continues to get worse; waves of immigration to neighboring countries like Columbia has become its own self-contained mini crisis, while the internal economy disintegrates.

Once again, there is a tangible energy fallout, this one involving the continuing decline in genuine Venezuelan crude exports to the international market.

Each of these taken alone is disquieting.

All three operating at the same time signals intense volatility is building.

There Will Be Volatility Coming Sooner Rather Than Later

All three of these situations are impacting how oil is being traded.

Expectations are high among foreign traders I talk to that the price of crude oil will continue to drift up, while more pronounced spikes will take place as perceptions deteriorate.

Each of these three crises contribute to pressures on oil prices. And so long as they remain unresolved, that pressure is going to contribute to rising levels.

The primary ingredient involves the level of uncertainty with which oil traders must contend. Traders hate uncertainty – it requires that they employ a greater degree of hedging in writing futures contracts.

As I have noted on several occasions in the past, under normal market conditions – if such an environment even exists these days – traders will peg contract prices to the expected price of the next available barrel.

However, in the current climate of forces prompting a rise in prices due to supply concerns, traders must hedge with options to offset increases, since that is the main side of risk. That translates into writing futures contracts using the expected cost of the most expensive next available barrel.

Of course, the same process was seen in reverse in 2015-2016 as prices collapsed.

In each case, traders cause an overreaction in one direction or the other as the futures contracts (the paper barrels) led real barrels in consignment (the wet barrels). The uncertainty factor is increasing in impact as we move into some heavy days in the Persian Gulf, Venezuela, and in the trade front with China.

There will be volatility, with the price of crude moving both up and down as the market in general, and traders in particular, respond to unfolding events.

With reference to the crisis du jour, Iran has given the other signatories to JCPOA (the Joint Comprehensive Plan of Action) until the beginning of July to develop a workable approach to saving the nuclear treaty. That was even before the current hostilities emerged.

If matters can be subdued (a very big if), we are likely to have less than two months for other parties to oppose U.S. sanctions.

If not, those nasty clouds on the horizon are going to develop into a serious storm.

Sincerely,


Kent

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  1. anthony van luyn
    May 17th, 2019 at 21:48 | #1

    One must ask the obvious.
    Why did Trump dump a treaty that all other signatories are happy with?
    Why should anyone trust a president who sends warships to Hormuz in order to bully his European Allies and Iran?
    Saudi Arabia is being forced into the arms of Russia because of continual American bullying and the E.U. has lost respect for the President of the USA as was made clear by the German Chancellor and the French President. That is whyvolatility is rising in the entire world economy

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