What’s happening: The price of oil soared to its highest level since 2008 on Monday, when Western countries assessed an embargo on oil from Russia, the world’s second-biggest exporter.
US oil futures jumped 6% to trade at $123 a barrel. Brent crude, the global benchmark, briefly jumped to $139 a barrel before dropping to $125. That’s still a jump of over 35% in just one month.
The Biden administration has so far avoided direct sanctions on Russia’s huge energy sector as President Vladimir Putin continues to escalate the war in Ukraine. However, the situation may change as bipartisan pressure intensifies and as Ukraine calls for even tougher sanctions against Moscow.
“Now we are in talks with our European partners and allies to consider in a coordinated manner the prospects for a ban on Russian oil imports, while making sure that there is still a corresponding supply of oil in world markets,” said US Secretary of State Anthony Blinken. said CNN’s Jake Tupper on Sunday.
In short, for many in the West there is already a de facto ban on Russian oil. Shippers, insurance companies and banks have decided they don’t want to risk sanctions or the logistical problems of delivering Russian cargo and are looking for suppliers elsewhere. (Shell recently bought Russian oil to fill pre-invasion orders, but said it would donate the profits to help “the people of Ukraine.”)
But since a formal embargo would be more specific, investors are spooked.
“That would make it even more likely that we will lose market supply from Russia in the short term,” Bjornar Tonhaugen, head of oil markets at Rystad Energy, told me.
Russia exports about 4 million barrels of oil per day to the West – mainly to Europe. Some of that supply could go to China or India, but it’s not yet clear how much, Tonhaugen said. The total volume of oil exports from Russia in December amounted to about 7.8 million barrels per day.
Removing millions of barrels of crude oil from a market already struggling to cope with limited supply and strong demand before Russia launched a war in Ukraine is a recipe for further tension.
Members of the Organization of the Petroleum Exporting Countries, including Saudi Arabia and the United Arab Emirates, could intervene, but last week they signaled they had no plans to intervene just yet. Negotiations on a nuclear deal with Tehran that could unlock Iranian oil exports stalled over the weekend.
How high can oil go? JPMorgan strategists said last week that if the disruption to Russian oil lasts “all year”, prices could rise to $185 a barrel.
But Tonhaugen believes oil prices may need to jump to $200 a barrel before demand really suffers and the market begins to rebalance. Bank of America also said that oil prices could reach $200 a barrel if “most of Russia’s oil exports are stopped.”
The price of an option to buy Brent oil at $200 a barrel more than doubled on Monday, according to ICE Futures Europe, indicating growing fears that prices could reach new levels. The highest price for Brent crude in July 2008 was $147.50.
The rapid rise in energy prices will have serious consequences for the economy, as it will force consumers to cut spending in other areas. The average price per gallon of regular U.S. gasoline hit $4 over the weekend, also the highest since 2008.
Not just oil: Prices of other commodities, including wheat, copper, aluminum and palladium, also jumped. The Bloomberg Commodity Index rose 13% last week, the biggest gain on record.
The bear market has arrived in Germany
German stocks officially fell into a bear market on Monday as investor fears about the economic fallout from the war in Ukraine intensified.
Last: the country’s core index DAX fell more than 4% in early trading. This pushed it over 20% below its recent peak in January.
A bear market indicates extreme selling pressure as anxious investors dump stocks at higher levels.
Remember: Germany, which gets half of its natural gas supplies from Russia, is particularly vulnerable to the effects of the conflict.
Economists at Deutsche Bank said in a report released on Friday that if Russian oil and gas supplies to Germany stop even temporarily, inflation could jump to 7%, causing the country’s economy to stagnate this year.
The European Stoxx 600 fell more than 3% on Monday. It is now about 17% below its January high.
“As oil and gas prices soar and worries about the impact on global economic growth, the specter of stagflation is hovering over financial markets,” Hargreaves Lansdown analyst Suzanne Streeter told clients Monday, citing a scenario of high inflation and low growth that was a nightmare. for the politicians of the 1970s.
China braces for sharp slowdown
China has set the lowest official economic growth target in three decades.
Speaking at one of the most important political gatherings in China this year, Premier Li Keqiang said that China is targeting GDP growth of around 5.5% this year. The world’s second largest economy grew by 8.1% in 2021, but the pace of growth slowed sharply in the last months of the year.
On the radar: Chinese policy makers are facing mounting challenges to keep growth steady, reports my CNN business colleague Laura He. The country is grappling with a real estate crisis and Beijing’s zero tolerance for the coronavirus. The fallout from the war in Ukraine could also slow growth by pushing up commodity prices.
“A comprehensive analysis of the development dynamics at home and abroad shows that this year the risks and challenges for development will increase significantly, and we must continue to make efforts to overcome them,” Li said.
China is facing “challenging conditions,” said Iris Pang, chief economist for Greater China at ING.
“The country still has a zero-Covid policy and consumption has been weak, while the impact of the policy on the real estate and technology sectors continues,” she said.
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