The GERM Report

-Recovery is not the same thing as normal

-Brent crude oil stuck around $44 per barrel for now

The price for crude oil remained range-bound in early Tuesday trading, though calendar spreads are indicative of a more severe glut. In the United States, politicking has taken precedent over the public as lawmakers debate the latest round of stimulus. In Europe, the recovery remains slow with Spanish unemployment coming in better than expected in the second quarter, but still worse than previous levels. In Asia, a slump in demand is expected, though China’s spending spree on cheap crude is masking some of the weakness. Elsewhere, there’s no lack of geopolitical risk, from Lebanon to Sino-Russian arm-locking and explosions in Iran.

The price for Brent crude oil was wavering around a flatline early Tuesday, oscillating in the upper range of $43 per barrel. The global benchmark was down 0.09% as of 8 a.m. ET to trade at $43.86 per barrel after the teeniest gain in the previous session. The market tone may be set by the United States as lawmakers race against the stimulus clock.

Storied Reuters energy analyst John Kemp in his morning newsletter noted Tuesday that the five-week calendar spread for Brent slipped into contango for the first time since early June. The trading structure, where futures are trading above the spot price, implies an oversupply situation. Demand destruction in the quarantine economy continues to hold, and the rush of oil expected from OPEC in the coming days only adds to the supply-side fears.

Social support mechanisms for the estimated 19 million US citizens without a job have already expired, or are set to on Friday. In May, about half the US population was off the payroll and incomes were supported by $1,200 in individual deposits and $600 per week in extra unemployment insurance checks. Right-leaning lawmakers in the Republican party teased out a package last week, but only formally introduced their opening bid Monday evening. Republicans argue the $600 in extra support was a disincentive to work, while opponents point out much of the US economy is either closed off or curbed sharply. The Republican package includes another round of $1,200 in direct deposits and boosts insurance by $200 week. States would then need to go through the arduous task of resetting their application systems to cap support at 70% of previous wages, capped at an additional $500 per week. Democrats will likely argue the offer is a short-change one that’s overly complex. Extended arguments in an increasingly polarized political climate will likely make for painful times ahead for many American households.

In the continental economy, Spain reported second quarter unemployment at 15.3%, better than expected, but still worse than the previous report of 14.4%. European lawmakers managed to hammer out a massive $850 billion stimulus package after a bruising round of talks last week. In an era where liberal connectivity is falling out of fashion, German Chancellor Angela Merkel and French President Emmanuel Macron declared it a victory for unity on the continent.

In the Asian economies, consultant group Wood Mackenzie in a report out Tuesday finds demand is shrinking by some 1.8 million barrels per day year-on-year for 2020.

“Although demand continues to grow, the rate of growth in the next 20 years is less than half that of the past 20 years, primarily because of higher fuel efficiency, penetration of electric vehicles and displacement of oil in the transport sector,” Wood Mackenzie research director Sushant Gupta said in a statement.

That presents a challenge for an upstream sector not necessarily tooled to churn out refined petroleum products. China, meanwhile, continues to gobble up cheap crude oil, taking in a steady stream of Russian and Saudi crude oil during the second quarter. The Reuters news agency, relying on data provider Refinitiv, reports the strong Chinese appetite masks weakness elsewhere in the regional economy. India imported some 3.68 million bpd of oil in July, a slight uptick from June, but still below last year’s range of around 4.4 million bpd before the pandemic. Japan and South Korea too showed a slight increase in crude oil demand, though levels are about 10% lower than pre-pandemic intake. Economists at OPEC expect some recovery in what the consider a rather resilient market, though the stubbornness of the pandemic suggests recovery is not the same thing as normal.

But beneath the noise of ongoing economic malaise is a growing sense of change in the international system. Tensions between the United States and China escalated last week after Washington ordered Beijing to shut a consular office in Houston. With alliances congealing around the multipolar order, China and Russia continue to infuse their systems into the global structure. China is proceeding with its Belt and Road Initiative, a Marshall Plan-like system across the Asian continent. Construction started Tuesday on a portion of a China-Russia natural gas pipeline, linking the two regional economies together in the energy sector. On its western flank, Russia’s Navy is conducting military drills in the Black Sea. Further west and tensions remain high on the border between Armenia and Azerbaijan. In Iran, meanwhile, another spat of mysterious explosions have rocked the Islamic Republic. Israeli forces squared off Monday near the disputed Shebaa Farms region of southern Lebanon with Hezbollah fighters just as Lebanon starts to buckle under severe political and economic strains.