There was not a lot to digest yesterday but the developments that have actually emerged are having a devastating impact on oil prices overnight. OPEC’s initial assessment of the co-ordinated SPR release and the sudden appearance of a new variant of the coronavirus raises serious concerns about economic growth and the oil balance in coming months. At the time of writing both crude oil futures contracts are around $4/bbl below last night’s price levels.
OPEC’s think tank, the Economic Commission Board, was quick to evaluate the alleged plan from large consumers to release about 45 million bbls of oil to the market in the space of four months, possibly between January and April next year. It concluded that the move would increase oversupply by 1.1 mbpd meaning that global supply will exceed demand by 2.3 mbpd in January and 3.7 mbpd a month later, as reported by Bloomberg.
Despite the perceived abundant supply in the first half of 2022 the market has not exactly been in a panicky mood over the last two days. Tuesday’s jump has been followed by a consolidation on Wednesday and yesterday with prices holding up reasonably well and the structure of the European crude oil benchmark actually strengthening. Curiously, whilst the January/February spread nearly doubled in value this week the February/March backwardation has narrowed. This implies that output adjustment from the OPEC+ alliance is needed otherwise the oil market will enter a phase of significant oversupply – as predicted by the ECB. We will find out soon enough what the group’s response to the consumers’ agreement will be as it meets next week to discuss the state of the market. Yesterday might have been dull but let us make no mistake: the hatchet has been dug up and the battle between consumers and producers will likely intensify.
Whilst the market digested the possible consequences of the SPR release and OPEC’s reaction to it the coronavirus is overwriting even the most pessimistic forecast on the immediate oil balance. The UK has announced that it will put six countries from the southern part of the African continent on the red list of travel restrictions due to a surge in cases of a heavily mutated variant of the virus. It was first identified in Botswana and according to scientists it transmits faster than the Delta variant and has the ability to evade vaccines. Attempts by governments and health authorities to contain the spread of the new mutant will be closely watched by investors in coming weeks. The initial reaction clearly implies that a new layer of uncertainty surfaced, and its longer-term impact is anything but unambiguous.
The infrastructure bill
Joe Biden’s presidency got off to a promising start as the inoculation programme in the United States kicked off in earnest after he moved into the White House helping the country’s economy continue its recovery and supporting US stock markets. Assorted fiscal stimuli, amongst which the $1.9 trillion relief bill was the most significant one, also provided invaluable help after the Covid-induced destruction. The US president is of the view, shared by other policy makers and economists on the Democrats’ side of the American political spectrum, that the most effective way to fight economic downturn is expansionary policy.
True to this conviction the current administration is planning to launch two more plans: the infrastructure and the Build Back Better packages worth 1.2 trillion and $1.75 trillion respectively. The latter passed the Congress last Friday but faces further scrutiny in the Senate, whilst the president signed the former into law at the beginning of last week. It was hailed as a successful bipartisan craftsmanship despite reservations from the other side that the plan will lead to prolonged inflation and increase in debt. Democrats, on the other hand, argued that the infrastructure scheme pays for itself via multitude of measures, including repurposing unused pandemic funds and without having to raise taxes. However, the Congressional Budget Office calculates that the package would increase the deficit by $256 billion in the next 10 years. Since the plan was designed to provide much-needed boost to the economy, including raw materials it is worth having a look at what it includes. After all, a joint statement released after the signing ceremony claimed that the law will “positively impact every American”.
The legislation sets aside $110 billion for roads, bridges and infrastructure projects. It will help improve the condition of 173,000 miles of highways and main roads, together with 45,000 bridges, will enhance transportation safety and will reconnect mainly Black communities that are divided by highways. It will modernize public transit, repair and upgrade existing infrastructure and replace aging rail and bus fleets with zero-emission models. It is the largest federal investment in public transit.
As much as $65 billion will be spent on broadband upgrade leading to declining subscription fees for households. Port and airport infrastructures will get a combined $42 billion boost and $7.5 billion will be provided for zero and low-emission buses and ferries. The same amount is to be spent on nationwide electric vehicle chargers. The power and water systems will also undergo major improvements by building new power lines and upgrade water infrastructure. These critical infrastructures will be protected from floods, drought and cyberattacks, according to the White House.
The original proposal would have seen corporate tax rise from 21% to 28% and would have increased the minimum tax on US corporations to 21% but the idea was eventually discarded. All in all, it is hoped and expected that the infrastructure bill will provide a solid basis for economic growth and will turbo charge US competitiveness in coming decades.