When War is not a Metaphor

We have voiced our objections to the militarization of the language surrounding foreign exchange and trade.  For several years, the media and journalists played up ideas of currency wars–beggar-thy-neighbor competitive devaluations.   Leave aside the fact that it was often indistinguishable from easy monetary policies to facilitate economic recovery and arrest deflationary forces.  

Now it is trade wars, which have captured the collective imagination.  While trade tensions have increased, these still seem to be low rungs on the escalation ladder.    So far, the trade actions cover a very small part of global trade and a small part of US trade. Announcing details of previously announced measures should not count as a fresh escalation.  However, with China’s retaliation, the ball is back in the US court.  Should the US retaliate now, the provocation would be an escalation. 

However, there are real wars taking place that are not simply metaphors.  Yesterday, Houthi rebels in Yemen struck a Saudi oil tanker with a missile.  The attack in retaliation for a Saudi strike on the only Yemeni seaport controlled by the rebels.  Saudi Arabia has led a coalition that has been bombing the Houthis and their allies for three years.  

The Houthis do not have an air force, but they have been supplied with missiles, ostensibly from Iran, and have used them against Saudi Arabia. Last month they struck with seven missiles.   Yemen is a catastrophe.  The UN estimates that 22 mln of the country’s 27 mln people need emergency aid, and 2/3 of the people have little or no food.  Yesterday, UN Secretary-General Guterres said that more than half the money raised for Yemen has come from Saudi Arabia.  

The conflict is generally understood as an expression of the underlying conflict between Iran and Saudi Arabia.  That conflict cannot be simply reduced to the Sunni/Shia.  Saudi Arabia is reaching out to the other large Shia country, Iraq.  There is a wide range of issues that separate Saudi Arabia and Iran and that conflict seem to be superseding the Israel-Palestine issue as the main organizing principle in the Middle East.  

Following the precept that the enemy of my enemy is a friend, there seems to be a rapprochement between Saudi Arabia and Israel.  The Crown Prince Mohammed bin Salman (MBS) is changing both domestic and foreign policy.  Last September, and behind several of its neighbors, Saudi Arabia finally permitted women to drive.  More recently, during his visit to the US, MBS explicitly recognized the right of Israel to exist.   Qatar may have been the first to thaw its relationship with Israel, with some trade and cultural exchanges. In the past, Saudi Arabia has set as a precondition for a closer bilateral relationship is for Israel to return to the pre-1967 borders, but this time that precondition seemed to have been dropped.  

In a parallel development, Saudi Arabia’s stock market is being considered for inclusion in the MSCI Emerging Markets Index and a decision is expected in June.  At the end of last month, FTSE Russell decided to begin including Saudi shares in its benchmark starting in the middle of next year.  It is estimated that around $5.5 bln will flow into Saudi stocks from this decision by passive funds.  The weighting of Saudi shares will be about 2.7% initially and could rise to 4.6% depending on the Aramco float expected early next year. 

Several new US Administration officials look to sharpen the US confrontation with Iran.  At the same time, Iran and Russia are improving ties.  Iran may either join or enter into a trade agreement with Russia’s “Eurasian Economic Union.”   As the rival blocs are hardening, it is noteworthy that OPEC is staying united.  Indeed, if the nuclear deal with Iran is scuttled, and sanctions against Iranian oil is reinstated, it may be positive for oil prices and the fear of such a scenario may have helped lift oil prices recently. 

Indeed, OPEC’s adherence to the quotas has been impressive, though the recent decline is not so much a function of discipline.  The loss of 100k barrels a day from Venezuela is due to economic incompetence, and a decline about half as much from Algeria is due to maintenance.  

Trade tensions are negative for oil prices, if for no other reason than it is perceived to weigh on world growth.  WTI for May delivery has fallen to a two-week low near $62 today.   A trendline off the mid-February low comes in slightly lower today and is rising 10 cents a day and will be at $62 at the end of the week.  Oil prices have been rising since mid-2017 (~$44.45), and the high reached in late March (~$66.50) appears to have completed a move.  Technical indicators warn the risk is on the downside.  

US oil inventories fell in two of the last three weeks of the Q1.  However, one of the reasons US inventories are falling is that exports are rising.  At the end of March, US crude oil inventories rose to a record of 2.18 mln barrels a day.  The US is exporting a little less than a fifth of its production. 



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