Daily Comment (August 7, 2017)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] It’s a quiet Monday morning in August.  Washington is mostly on recess and families are squeezing out the last few days of summer before school begins.  Here are the notable news items.

Sanctions on North Korea: The UNSC voted unanimously to apply further sanctions on North Korea.  If fully implemented, they would cut the Hermit Kingdom’s trade by about a third.  The real surprises were the “yes” votes from China and Russia.  We note that China’s foreign minister, Wang Yi, had intensive talks with his North Korean counterpart at the ASEAN meetings in Manila over the weekend, calling on North Korea and the U.S. to ratchet down tensions.  The Chinese media pressed the U.S. to ease off North Korea as well.  Despite these comments from Chinese sources, getting UNSC sanctions approved on North Korea is a major diplomatic win for the Trump administration.  We suspect part of China’s compliance involved hopes to delay trade tensions with the U.S.  Vetoing sanctions would have certainly triggered a U.S. reaction on trade.  We also suspect Russia went along because China voted in favor of sanctions.  Still, it’s a win for the administration; now we will be watching to see if the sanctions are implemented.

Iran’s widening reach: The NYT carried a report over the weekend that Iran is expanding its influence in Afghanistan by working with the Taliban.[1]  Iran has already widened its influence in Iraq as well.  Essentially, in areas where the U.S. has fought two wars since 2003 America has failed to build replacement governments for the Hussein regime and the Taliban.  Iran is rapidly filling this void.  On the surface, Taliban and Iranian cooperation appears odd.  The former, a hardline Sunni group, would generally view Shiites as an anathema.  However, the key point that is often missed is that Iranians should probably be thought of as Persians first and Shiites second.  As Persians, the Iranians are working to expand their influence and are less concerned with religious issues.  There is no easy solution to this issue in the Middle East.  The Obama administration appeared to have concluded that Iran was going to run the region and thus was willing to cooperate with them; the Trump administration is not comfortable with that position but doesn’t really have an alternative to containing Iranian influence.

A coup in Venezuela?  Turmoil in Venezuela remains extremely elevated.  The newly “elected” body to rewrite the constitution appears to be taking power and opposition leaders are being arrested again.  Over the weekend, there were reports of a military uprising.  This looks rather suspicious to us; if there was an uprising, it was in the lower officer ranks and this is little evidence of success.  Instead, we suspect this was a “false flag” operation of sorts.  If the Maduro regime can convince its internal opposition that it faces a potential coup it will tend to solidify support.  Thus, it wouldn’t surprise us if this was staged.  So far, there is no evidence that oil supplies have been affected by the problems in Venezuela.

OPEC meets: The oil cartel is meeting with selected non-OPEC members to monitor quota compliance.  As summer comes to a close, we are about five weeks away from the usual seasonal trough in inventories.  Although we have seen a drop in U.S. commercial crude oil stockpiles, current levels are not low enough to support prices much higher than current levels.  Thus, there are hopes that OPEC can engineer some sort of cuts in output at this meeting.  We doubt we will see much other than promises to improve compliance.

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[1] https://www.nytimes.com/2017/08/05/world/asia/iran-afghanistan-taliban.html