All eyes were on crude oil prices early this morning following news over the weekend that the US administration was discussing a possible Russian oil import ban with its European allies. Prices soared at the Asian open, with Brent crude rising $21 to trade slightly above $139 a barrel before falling back below $130.
Sanctioning Russian oil would be the biggest escalation in the West’s response to Moscow’s invasion of Ukraine, and it would have serious negative consequences for the global economy. While the Russian economy will be the most affected, Europe will likely fall into recession and US growth will be affected, with consumers being the most affected.
In 2008, demand destruction occurred when prices approached $140. Brent crude actually reached $147.50 in July 2008, shortly before the global financial crisis. Adjusting for inflation, prices must exceed $200 to have a similar effect on consumption. However, the current price spike is not a demand shock but a supply shock, and there is no cap in sight.
Russia currently exports around 4.5 million barrels of crude. If exports were cut in half, prices would likely remain high in the short to medium term around current levels, even if the United States and other countries release oil from their strategic reserves. However, if the crisis worsens and Europe imposes sanctions on Russian oil with no response from OPEC members, expect prices to rise above $200.
It’s not just oil prices that are hitting multi-year highs. Aluminum, copper, zinc, palladium, corn and wheat are among the many commodities that have recently seen a spike in prices. All of this complicates the outlook for central banks around the world.
Despite the rapid rise in inflation, the ECB is likely to delay any policy tightening plans at its meeting on Thursday. Additionally, the war in Ukraine will force the central bank to take a more cautious approach to withdrawing accommodative policies, putting further pressure on the euro, which has fallen to a two-year low against the dollar and tested parity. with the Swiss franc for the first time. in seven years.
The rush to safety sent real 10-year yields back to extremely low levels of -0.90%; meanwhile, 5-year break-even rates topped 3.2% for the first time ever. This reflects nervousness in bond markets over stagflationary pressures, which also pushed the price of gold momentarily above $2,000.
Expect Ukrainian headlines to continue to boost markets over the next few days, with volatility remaining elevated as investors grapple with how this crisis will end.