LONDON: US sanctions on Russian oil imports have pushed the price of Brent crude to around $140 a barrel, its highest level since 2008.
Russia is the world’s top exporter of crude and oil products combined, accounting for about 7 million barrels per day (bpd), or 7% of global supplies. Such a ban is unprecedented, with turbocharging already skyrocketing and risking inflationary shocks.
Here are some possible consequences of the ban:
record prices
Western governments have not directly approved Russia’s energy sector, but some customers are avoiding its oil to avoid getting into legal trouble later.
JPMorgan predicts that oil could reach a record $185 a barrel by the end of 2022 if disruptions to Russian exports are prolonged, although with most analysts surveyed by Reuters the bank is expected to see annual growth rates below $100. Expected average price.
The last time oil prices were above $100 was in 2014 and the level reached on Monday was not much shy of the July 2008 peak of over $147. This is a sharp climb from two years ago, when the coronavirus-driven demand slump was seen. A barrel of West Texas crude was below $0 because sellers had to pay to get rid of it.
“The prolonged war, which causes widespread disruption in commodity supply, could see Brent move above $150 a barrel,” said Giovanni Stanovo, commodities analyst at UBS.
inflation shock
With natural gas prices hitting an all-time high, rising energy costs are expected to push inflation above 7% on both sides of the Atlantic in the coming months and deepen households’ purchasing power.
As a rule of thumb, every 10% increase oil price In Euro terms, euro area inflation tends to range from 0.1 to 0.2 percent. Since January 1, Brent crude is up nearly 80% in the euro. In the US, a $10 per barrel increase in oil prices leads to a 0.2 percent increase in inflation.
In addition to being a major supplier of oil and gas, Russia is also the world’s largest grain and fertilizer exporter and a top producer of palladium, nickel, coal and steel. A bid to cut its economy out of the trading system would hit a wide range of industries and increase global food security fears.
hit for development
A ban on Russian oil will further slow the nascent global recovery from the coronavirus pandemic.
Preliminary calculations by the European Central Bank (ECB) suggest the war could cut euro area growth by 0.3 to 0.4 percentage points this year, up to 1 percentage point in the baseline scenario and 1 percentage point in the case of a severe setback.
In the coming months, there is a high risk of high inflation as well as a stagflationary slowdown, or at least minimal growth. However, going forward, euro area growth is likely to remain strong, even if commodity prices prove to be a drag.
In the US, the Fed estimates a 0.1 percentage point cut for every $10 per barrel increase in oil prices, though private forecasters see a more muted effect.
In Russia, the damage is likely to be large and immediate. JPMorgan estimates that its economy will shrink 12.5% from peak to trough.
central bank effect
For the US Federal Reserve, the impact of inflation has already proved too great and its chairman Jerome Powell has said interest rates need to be raised this month, adding pressure to borrowers.
For the ECB, the urgency of policy action is less acute because there is still excess capacity in the labor market and very low domestic inflation.
“No one can seriously expect the ECB to begin normalizing monetary policy at such a moment of high uncertainty,” said ING economist Carsten Brzewski.
Option?
With the pandemic reemerging demand for fossil fuels, but with supplies still tight around the world, policymakers will be under pressure to accelerate supply despite promises to support green energy.
“There will be a dial back on green initiatives in the short term in an effort to reverse the contraction we have seen in fossil fuel supplies,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdowne.
Negotiations to free Iran from international sanctions are in advanced stages and high oil prices are set to spur investment in US shale, but supplies to replace Russian production are not scheduled to come online anytime soon Is.
“The potential supply effects are so large that there is no quick way to offset that in the medium term, meaning that the only drawback would be price inflation of these inputs and the products that depend on them,” said Alex Collins, senior corporate analyst. in Bluebay Asset Management.
long view
The Russian-West standoff could strengthen Moscow’s ties with Beijing but the energy infrastructure between the two countries is scant.
Kaho Yu, principal Asia analyst at risk consultancy Verisk Maplecroft, said, “Although Russia’s pivot to the east has accelerated gas cooperation with China through gas infrastructure … all these developments are still in their infancy. Huh.”
The medium to long term could boost renewables as countries look to distance themselves from Russian energy.
“We must now take the subsidies given to natural gas, coal and petroleum and put them into renewable energy generation, electric mobility and EV charging infrastructure, heat pumps, building efficiency upgrades,” said Professor Wolfgang Ketter from the School of Rotterdam. Management at Erasmus University in the Netherlands.
“Anything that will lead to long-term energy security by reducing fossil fuel dependence.”
Russia is the world’s top exporter of crude and oil products combined, accounting for about 7 million barrels per day (bpd), or 7% of global supplies. Such a ban is unprecedented, with turbocharging already skyrocketing and risking inflationary shocks.
Here are some possible consequences of the ban:
record prices
Western governments have not directly approved Russia’s energy sector, but some customers are avoiding its oil to avoid getting into legal trouble later.
JPMorgan predicts that oil could reach a record $185 a barrel by the end of 2022 if disruptions to Russian exports are prolonged, although with most analysts surveyed by Reuters the bank is expected to see annual growth rates below $100. Expected average price.
The last time oil prices were above $100 was in 2014 and the level reached on Monday was not much shy of the July 2008 peak of over $147. This is a sharp climb from two years ago, when the coronavirus-driven demand slump was seen. A barrel of West Texas crude was below $0 because sellers had to pay to get rid of it.
“The prolonged war, which causes widespread disruption in commodity supply, could see Brent move above $150 a barrel,” said Giovanni Stanovo, commodities analyst at UBS.
inflation shock
With natural gas prices hitting an all-time high, rising energy costs are expected to push inflation above 7% on both sides of the Atlantic in the coming months and deepen households’ purchasing power.
As a rule of thumb, every 10% increase oil price In Euro terms, euro area inflation tends to range from 0.1 to 0.2 percent. Since January 1, Brent crude is up nearly 80% in the euro. In the US, a $10 per barrel increase in oil prices leads to a 0.2 percent increase in inflation.
In addition to being a major supplier of oil and gas, Russia is also the world’s largest grain and fertilizer exporter and a top producer of palladium, nickel, coal and steel. A bid to cut its economy out of the trading system would hit a wide range of industries and increase global food security fears.
hit for development
A ban on Russian oil will further slow the nascent global recovery from the coronavirus pandemic.
Preliminary calculations by the European Central Bank (ECB) suggest the war could cut euro area growth by 0.3 to 0.4 percentage points this year, up to 1 percentage point in the baseline scenario and 1 percentage point in the case of a severe setback.
In the coming months, there is a high risk of high inflation as well as a stagflationary slowdown, or at least minimal growth. However, going forward, euro area growth is likely to remain strong, even if commodity prices prove to be a drag.
In the US, the Fed estimates a 0.1 percentage point cut for every $10 per barrel increase in oil prices, though private forecasters see a more muted effect.
In Russia, the damage is likely to be large and immediate. JPMorgan estimates that its economy will shrink 12.5% from peak to trough.
central bank effect
For the US Federal Reserve, the impact of inflation has already proved too great and its chairman Jerome Powell has said interest rates need to be raised this month, adding pressure to borrowers.
For the ECB, the urgency of policy action is less acute because there is still excess capacity in the labor market and very low domestic inflation.
“No one can seriously expect the ECB to begin normalizing monetary policy at such a moment of high uncertainty,” said ING economist Carsten Brzewski.
Option?
With the pandemic reemerging demand for fossil fuels, but with supplies still tight around the world, policymakers will be under pressure to accelerate supply despite promises to support green energy.
“There will be a dial back on green initiatives in the short term in an effort to reverse the contraction we have seen in fossil fuel supplies,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdowne.
Negotiations to free Iran from international sanctions are in advanced stages and high oil prices are set to spur investment in US shale, but supplies to replace Russian production are not scheduled to come online anytime soon Is.
“The potential supply effects are so large that there is no quick way to offset that in the medium term, meaning that the only drawback would be price inflation of these inputs and the products that depend on them,” said Alex Collins, senior corporate analyst. in Bluebay Asset Management.
long view
The Russian-West standoff could strengthen Moscow’s ties with Beijing but the energy infrastructure between the two countries is scant.
Kaho Yu, principal Asia analyst at risk consultancy Verisk Maplecroft, said, “Although Russia’s pivot to the east has accelerated gas cooperation with China through gas infrastructure … all these developments are still in their infancy. Huh.”
The medium to long term could boost renewables as countries look to distance themselves from Russian energy.
“We must now take the subsidies given to natural gas, coal and petroleum and put them into renewable energy generation, electric mobility and EV charging infrastructure, heat pumps, building efficiency upgrades,” said Professor Wolfgang Ketter from the School of Rotterdam. Management at Erasmus University in the Netherlands.
“Anything that will lead to long-term energy security by reducing fossil fuel dependence.”