Oil's price ascent is showing no signs of slowing down ahead of one of the most important OPEC+ meetings since the beginning of the pandemic. WTI crude futures (CL1:COM) climbed another 6.6% overnight to top $110 per barrel, and that was despite the U.S. and other members of the IEA agreeing to release 60M barrels from the Strategic Petroleum Reserve and other emergency stocks. The coordinated drawdown would be only the fourth in the agency's history, sending a "unified and strong message to global oil markets that there will be no shortfall in supplies as a result of Russia's invasion of Ukraine."

Analyst commentary: "Although the sanctions are still being crafted to avoid energy price shocks, we believe this aggressive-but-not-maximalist stance may not be sustainable, with disruptions to oil and gas shipments looking increasingly inevitable," Evercore ISI wrote in a note to clients. "Russia is casting a long, dark, unpredictable, and very complicated shadow." Part of the issue is that many Western banks, shipowners and refiners are hesitant to do business with Moscow, fearing legal/reputational risk, or an eventual sanctioning of Russia's energy sector.

Meanwhile, the OPEC+ group, which Russia is a part of, commands broad control of the oil market because its members account for more than 40% of global crude production. The alliance has been recently increasing output by 400K barrels per day each month after unwinding historic cuts of nearly 10M bpd implemented in April 2020 due to the pandemic. Despite the current turmoil in energy markets, only a modest increase is expected at today's meeting - if any at all - which could fluctuate based on the situation in Ukraine or the world's response to it.

Inflation watch: A general rule of thumb states that for every $10 increase in the price of an oil barrel, U.S. inflation rises by 0.4 to 0.5 percentage points. That's hammering consumers at the pump, with the national average for a gallon of gas standing at $3.65 per gallon, according to data from AAA. "Global energy security is [also] under threat," according to IEA Executive Director Fatih Birol, "putting the world economy at risk during a fragile stage of the recovery." (5 comments)

State of the Union

On Russia: President Biden said that Vladimir Putin will have to "pay a price" for the invasion into Ukraine during his first State of the Union address to Congress. "Throughout our history we've learned this lesson – when dictators do not pay a price for their aggression, they cause more chaos. They keep moving. And, the costs and threats to America and the world keep rising." "Putin's war was premeditated and unprovoked. He rejected efforts at diplomacy. He thought the West and NATO wouldn’t respond. And, he thought he could divide us here at home. Putin was wrong. We were ready."

Inflation: Biden also vowed to fight inflation during the speech, with consumer prices soaring 7.5% over the past 12 months. "My top priority is getting prices under control. We have a choice. One way to fight inflation is to drive down wages and make Americans poorer. I think I have a better idea to fight inflation: Lower your costs, not your wages. Make more cars and semiconductors in America. More infrastructure and innovation in America. More jobs where you can earn a good living in America instead of relying on foreign supply chains, let's make it in America. My plan to fight inflation will lower your costs and lower the deficit."

Infrastructure: "We're done talking about infrastructure weeks. We're going to have an infrastructure decade. We'll create good jobs for millions of Americans, modernizing roads, airports, ports and waterways all across America. And we'll do it to withstand the devastating effects of the climate crisis and promote environmental justice. We'll build a national network of 500K electric vehicle charging stations, begin to replace poisonous lead pipes - so every child - and every American - has clean water to drink at home and at school, provide affordable high-speed internet for every American - urban, suburban, rural and tribal communities."

Manufacturing: "The revitalization of American manufacturing: Companies are choosing to build new factories here, when just a few years ago, they would have built them overseas. Intel (INTC), the American company that helped build Silicon Valley, is going to build its $20B semiconductor mega site. Ford (F) is investing $11B to build electric vehicles, creating 11K jobs across the country. GM (GM) is making the largest investment in its history - $7B to build electric vehicles, creating 4K jobs in Michigan. All told, 369K new manufacturing jobs are created in America last year alone."

Taxes: Under my plan, nobody earning less than $400K a year will pay an additional penny in new taxes. Nobody. The one thing all Americans agree on is that the tax system is not fair. We have to fix it. I'm not looking to punish anyone. But let's make sure corporations and the wealthiest Americans start paying their fair share. Just last year, 55 Fortune 500 corporations earned $40B in profits and paid zero dollars in federal income tax. That's simply not fair. That's why I've proposed a 15% minimum tax rate for corporations... That's why I've proposed closing loopholes so the very wealthy don’t pay a lower tax rate than a teacher or a firefighter." (362 comments)

Airspace ban

Following in the footsteps of the EU and Canada, President Biden also announced a ban on Russian aircraft and airlines entering American airspace due to Moscow's invasion of Ukraine. According to Western military officials, the war is now heading into a new phase, with Russia turning to heavy artillery and the indiscriminate shelling of civilian neighborhoods. The more destructive stage even prompted Ukraine to sell $270M worth of war bonds overnight, ahead of a planned siege on the capital of Kyiv.

Quote: "We will join our allies in closing off American air space to all Russian flights, further isolating Russia, and adding an additional squeeze on their economy," Biden exclaimed in his first State of the Union address. The ban, which will take effect by the end of today, will prohibit any plane owned, certified, operated, registered, chartered, leased, or controlled by, for, or for the benefit of a person who is a citizen of Russia from flying over the U.S.

Russia is expected to retaliate with similar measures and may even go after Boeing (NYSE:BA), a major American exporter and one of the world's two leading aircraft manufacturers. While U.S. carriers don't operate any non-stop flights to Russia, its airspace is part of a key corridor for many long-haul flights to Asia. United Airlines (NASDAQ:UAL) typically flies over Russia en route to India, while Delta (NYSE:DAL) and American Airlines (NASDAQ:AAL) already suspended flying over Russian airspace earlier this week.

Go deeper: Russia is said to derive a significant amount of money from the fees it imposes to use its airspace, or to land at one of its airports. The new ban will also affect the lucrative air-cargo services markets, impacting operations of carriers like FedEx (NYSE:FDX) and UPS (NYSE:UPS). In fact, cargo flights between Asia and North America account for a quarter of global freight traffic, according to the IATA, putting the supply chain on watch once again. (2 comments)

In the hot seat

Fed Chairman Jerome Powell will walk a tightrope over the next couple of days, addressing separate House and Senate panels as part of biannual hearings on monetary policy. The testimony before Congress will likely be his final public remarks before the FOMC embarks on a rate hike cycle, with inflation running at its highest level since the 1980s. Powell will emphasize his commitment to taming the price pressures, while being mindful of economic growth and geopolitical tensions surrounding Russia and Ukraine (not an easy task). Lawmakers will meanwhile question the Fed's balance sheet and global dollar demand, as well as labor/supply bottlenecks and financial conditions and stability.

Snapshot: Up until a week ago, markets were pricing in 25 basis point hikes at each of the FOMC's seven remaining meetings for 2022. There were even expectations of a stronger move this month, with some forecasting a 50 bps increase at the March 15-16 gathering. However, once the crisis in Ukraine erupted, investors dialed back those beliefs, and are now seeing around five hikes this year to bring the Fed funds futures rate up to a range of 1.25%-1.5%, according to CME data.

"Powell has to thread a pretty thin needle. The balancing act is going to be difficult," explained Mark Zandi, chief economist at Moody's Analytics. "My sense is he leads with the uncertainty that this all creates given that the Russian invasion could take many different paths, each one darker than the other. He'll reinforce the point that in a period of such heightened uncertainty, it might make sense for the Fed to be a little more cautious in enacting policy."

State of the Union: President Biden also made a reference to the central bank in last night's address, saying "confirm my nominees to the Federal Reserve, which plays a critical role in fighting inflation." (10 comments)

Today's Markets

In Asia, Japan -1.7%. Hong Kong -1.8%. China -0.1%. India -1.4%.
In Europe, at midday, London +0.8%. Paris +0.4%. Frankfurt +0.1%.
Futures at 6:20, Dow +0.5%. S&P +0.5%. Nasdaq +0.6%. Crude +6.6% to $110.27. Gold -0.7% to $1930. Bitcoin +1.4% to $44,150.
Ten-year Treasury Yield +4 bps to 1.75%

Today's Economic Calendar

Auto Sales
7:00 MBA Mortgage Applications
8:15 ADP Jobs Report
9:00 Fed's Evans: U.S. Monetary Policy
9:00 Fed's Bullard: U.S. Economic and Monetary Policy
10:00 Powell Testifies on Semi-Annual Monetary Policy Report
10:30 EIA Petroleum Inventories
11:00 Survey of Business Uncertainty
2:00 PM Fed's Beige Book