Over the Weekend
Fighting in Mariupol continues with Kyiv rejecting Russian demands to surrender the strategically valuable port city. Some 300,000 civilians are estimated to be trapped in the city as essential supplies are running low.
Over the weekend we learnt that Saudi Aramco will significantly increase production over the next five years. This will involve increasing production capacity from 12m barrels daily (b/d) to 13m b/d by 2027 and increasing capital expenditure to around $40-50bn this year – up from $32bn last year. This announcement follows recent attempts by Biden and Johnson to get Saudi Arabia to ramp up production in order to help alleviate the surge in oil prices which soared to 14-year highs this month. Of course, Saudi Aramco has been a beneficiary of the increase in energy prices seen over the last year with net income increasing to $110bn in 2021 (although this increase had much to do with their 2020 income being ‘just’ $49bn when oil prices fell due to the pandemic-induced slowdown in global consumption). Hence, given the recent sanctions on Russia – which some analysts believe could remove some 2.5m b/d from global production – their announcement will no doubt have been well received by Biden and Johnson, especially following Opec’s decision earlier this month to raise output by just 400,000 b/d.
Another beneficiary has been Shell which has seen profits hit $20bn in 2021 – a marked difference to its $21bn loss in 2020. Much of this increase has been down to Shell’s major exposure to LNG where it maintains some 20% of global liquefaction capacity and LNG shipping. More generally, China has doubled its LNG imports from Russia over the month of February despite Russian LNG costing some $786 a ton more than other suppliers such as Qatar and Australia. With much of the global community imposing strict sanctions on Russia, this raises questions on the extent to which Beijing will support Moscow and help support Russia’s crippling economy.
UK Fuel Duty
Sticking with oil, yesterday Rishi Sunak announced that the government would be cutting fuel duty by 5p in an attempt to reduce prices at the pumps which have surged to 165.9p per litre for petrol and 177.3p per litre for diesel. It is estimated that this policy will cost the Treasury around £2.5bn a year in lost tax receipts and represents a change in direction from the current 58p charge which has been frozen for over a decade. Nevertheless, as the shadow chancellor was keen to point out, this cut will only reduce the cost of filling up a tank by around £2. Furthermore, in the wider context of energy prices, this policy will do little to cushion the blow of the energy price cap being lifted by 54% next month.
Sunak’s announcement yesterday, is a prelude to his spring Statement which will be delivered on Wednesday. While public spending this year is expected to be some £23bn less than initially forecast by the OBR, Sunak will have to navigate growing concerns about the rising costs of living while remaining cognisant of the fact that public debt has surged to 95% of GDP (its highest level since the 1960s). Indeed, with inflation standing at 5.5% and average wages falling at the fastest rate since 2014, there have been growing calls (including from Tory back benchers) for the Treasury to back-track on its commitment to raise National Insurance contributions by 1.25% in April. Nevertheless, Sunak is not expected to make any such U-turn.
Overall, NI contributions are expected to raise around £200bn between 2021–22 which represents about a 25% of all government tax receipts. Of this figure, around £82bn is that of employer contributions while £56bn is from employee contributions.
Aside from Sunak’s Spring Statement, this week all eyes will be on UK CPI figures released on Wednesday morning, in addition to Eurozone Markit PMI figures and UK Markit services data out on Thursday. Additionally, On Thursday, world leaders from Nato and G7 will gather in Brussels for to discuss the conflict in Ukraine and relations with Russia moving forward.
Have a great day.