Investors are looking to reduce their exposure to oil-dependent industries as the highest oil price in more than a decade raises concerns about the global economy and strikes again at sectors that have just recovered from the pandemic.
Russia’s invasion of Ukraine has sent commodity markets into turmoil, pushing Brent crude to levels not seen just before the 2008 financial crisis and pushing European gas prices to new highs.
The prospect that energy prices could jump even higher if other countries follow the United States in imposing an oil embargo on Russia, and the Kremlin cuts oil and gas supplies in response, has put financial markets on edge.
Companies on the radar of investors range from airlines to companies that use oil in their manufacturing processes. American Airlines has been hit hard, with its stock down nearly a fifth this month and its debt among the worst in the junk bond market.
Budget carrier Wizz Air is one of the European carriers most shunned by investors, while yields on Delta Air Lines’ $600 million bond maturing in 2029 soared to levels not seen since the coronavirus pandemic devastated aviation industry. Shares and bonds of tire maker Goodyear Tire & Rubber were also hit.
Early last week, the international oil benchmark for Brent oil jumped to almost $140, just a few dollars off the record set in July 2008. .
“Given Russia’s key role in the global energy supply, the global economy could soon face one of the largest energy supply shocks in history,” said Goldman Sachs economists, who forecast oil could rise to $175 a barrel.
While the commodity price spike eased towards the end of last week, economists and analysts warn that the health risks to companies and major economies will increase if energy prices remain elevated.
“This is an emergency,” said John Hess, head of Hess Corp, one of the largest US oil producers, echoing warnings from groups such as Occidental Petroleum and Pioneer Natural Resources. Gasoline prices in the US, the world’s largest oil market, are already at record highs and analysts expect them to rise further.
European Central Bank President Christine Lagarde warned last week that the invasion of Ukraine was a “major shock” to the eurozone economy as the central bank forecast higher inflation and lower growth over the next three years.
European companies have already been hurt by the surge in gas prices, which Russia considers one of its main exports. The Czech group Draslovka, the world’s largest producer of sodium cyanide, said this weekend that it had been forced to suspend production in Europe due to rising prices.
The surge in oil prices so far has exacerbated the problem facing the Federal Reserve, which has already been trying to curb inflation and is expected to raise interest rates this week despite the turmoil that followed the invasion.
However, there is growing concern on Wall Street that higher energy prices will eventually hit consumers and squeeze American companies. Economists at Goldman Sachs and Wells Fargo cut their growth forecasts for the US economy last week.
Oleg Melentiev, a credit analyst at Bank of America, said a sustained price hike above $125 a barrel would hurt.
“Credit stress could increase, credit spreads could widen, it could even lead to a credit crunch if we get above that level to $150 a barrel,” he said. “You can have conditions where the credit markets are essentially stuck.”