Daily Comment (July 5, 2017)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Back to work!  Here are the items we are following this morning:

North Korea’s ICBM: Over the holiday, North Korea launched an ICBM that is at least capable of reaching Hawaii and Alaska and could hit much of Asia, along with northern Australia.  Although there is no official red line from the Trump administration, an ICBM that could hit the U.S. mainland is probably it.  As we discussed recently in our WGR series on North Korea,[1] there really aren’t any good options.  The South Korean government has offered a freeze of current technology in return for negotiations.  We doubt that will work because Kim Jong-un is convinced that without a deliverable nuke he risks the same fate as Saddam Hussein and Muammar Gaddafi.  The U.S. has discussed attacking missile sites pre-launch to ensure that the U.S. would not be hit.  However, North Korea has rolled out a solid propellant rocket that can be launched quickly, making that defense questionable.  As we noted, if the U.S. decides to go to war, Seoul is in range of North Korea’s massed artillery.  So far, the U.S. and South Korea have held joint missile exercises in response.  The situation in North Korea is becoming increasingly untenable and the risks of war are rising.  Does this mean war is a risk within the next few months?  Probably not, although the potential is rising given the pace of escalation.  So far, there isn’t clear evidence that North Korea can put a warhead on these missiles but most analysts expect that it’s only a matter of time.

The G-20 begins Friday: President Trump will visit Poland before the G-20 meeting in Germany.  Already, Chancellor Merkel has made harsh comments about Trump’s policies; this could prove to be a frosty meeting, at least with the Europeans.  The president is also expected to meet with Russian President Putin.  We doubt anything comes of it, although there is great concern about the meeting in the media.  Rarely do important decisions get made in brief meetings.

Qatar facing further isolation?  The GCC nations are considering expelling Qatar from the group.  The GCC made a list of demands to Qatar which it describes as “non-negotiable.”  The problem is that the more the GCC isolates Qatar, the more it will align with Turkey and perhaps even Iran.  The Trump administration remains divided on this issue, with SOS Tillerson calling for meetings and restraint while President Trump appears to be cheering on the GCC.  We expect this standoff to continue; if it escalates to military action, regional stability could be at risk.

Russia says “nyet” to further cuts: Oil prices are weaker this morning after Russia indicated it would not support additional supply cuts.  This isn’t really a surprise.  If further cuts are coming, the Saudis will have to bear the loss of market share.  We continue to hold that oil prices are in a trading range; we are up from the bottom of the range but expect choppy markets as prices approach the high $40s.

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[1] See our recent two-part WGR series on The Second Korean War: Part I, 6/19/17; and Part II, 6/26/17.