-Europe overcomes its differences. Can the United States?
-Weak demand and low commodity prices will stick around for awhile.
A protracted battle in France finally paid off for the European Union, which passed a massive stimulus bill and adjusted its 2021-2027 budget to offset the deepest recession in generations. That’s good for a bloc-wide economy expected to contract by some 8% in 2020. Lawmakers in the United States, meanwhile, are trying to pass their own cash injection, though partisan bickering over wish lists could derail the effort. Demand is expected to remain low at least through the first quarter of 2021, while the low-price economy keeps production idled. The price of oil has room to fall despite the rally Tuesday, however, as OPEC eases back on voluntary curtailments in August. That said, the front-month trade levels show Brent may be in a bit of a holding pattern.
The price for Brent crude oil was up 2.9% as of 8 a.m. ET to hit $44.52 per barrel. The rally was supported in large part by optimism over pandemic relief efforts circulating through the world’s largest economies.
“We did it,” European Council President Charles Michel stated on his Twitter feed on Tuesday. “We have reached a deal on the recovery package and the European budget for 2021-2027.”
Deeply symbolic in an age when liberalism is falling out of favor, the 27 members of the bloc agreed after a lengthy summit to pump some $857 billion into the European economy and adopt a $1.14 trillion budget for the 2021-27 period to repair an economy battered by the closures stemming from the viral pandemic. According to economist at the Organization of Petroleum Exporting Countries, the European economy is expected to shrink by 8% this year before rebounding in 2021. OPEC economists in their market report for July stated that monetary stimulus measures were already paying off and recovery is expected to be “significant” during the second half of the year. That’s bullish for crude.
The European rescue package was passed in spite of stiff opposition from Dutch and other so-called frugal states wary of unaccountable debt. French President Emmanuel Macron acknowledged that compromise left the deal somewhat short of core continental expectations, but tough negotiations along multilateral lines paid off. When Germany and France come together, he said, they can’t do everything, but if they remain at loggerheads, nothing can get done.
“This long negotiation was marked by difficulties, sometimes oppositions, different conceptions of Europe,” he said. “But I am happy that with the Chancellor [Angela Merkel], we have always been on the side of ambition and cooperation.”
The spirit of cooperation will be put to the test in the United States, which is debating a fresh round of stimulus just days before massive social welfare programs end. The political faithful of US President Donald Trump tried Monday to plead for concessions as lawmakers debated competing stimulus packages. From revenue for increased testing for coronavirus, caveats on school re-openings and which income brackets are left out, the opening bid for relief may be a prelude to a protracted political fight tainted by a presidential election cycle. The International Monetary Fund last week warned that, without another round of financial relief, the US economy will continue to linger in negative growth.
The contrast between the European stimulus debate and the US stimulus debate is in some ways reflective of geopolitical might. Nationalist and populist political trends coincide with emerging frustrations that the liberal world order had not paid off as expected. European leaders, despite the exit of the United Kingdom, continue to hold out hope for liberalism, while the concept is eroding in the United States. Geopolitical influence of a different sort may be tied to the energy sector. The battle for supremacy plays out along trade lanes, as exemplified by the US opposition to a Russian natural gas pipeline to Germany. The United States has managed to extend its influence over the horizon politically, but its economic reach is limited. Sources speaking to the Reuters news agency said that low commodity prices were extinguishing the appetite for US liquefied natural gas.