Oil… The news that the Russian army bombed Europe’s largest nuclear center and that there was a fire caused the oil to rise again. Energy prices are rising significantly higher. Factors that could be stabilizing, such as Iranian oil, are not in play yet. We can say that if the tensions rise even more or if the sanctions target Russia’s energy sector, the price balance may rise even higher. Net oil consumers or importers will find that high oil prices suppress economic growth.
Inflation, economic and operational risks… Sanctions targeting CBR FX reserves and Russia’s sovereign wealth fund have eroded the country’s external buffers and foreign exchange reserve coverage is no longer sufficient. Therefore, although it is a country that is a net producer or exporter of oil, it will not act in the sense that it can use the situation in a positive way. The Russia/Ukraine crisis has raised concerns about possible supply disruptions for some other important commodities, especially oil. The potential for a sustained increase in oil prices will have a more pronounced effect on global inflation. Considering how sensitive the eurozone, which imports most of its oil, coal and natural gas directly from Russia, is to the current rise in energy prices, it would mean an additional risk of increased domestic inflationary pressures and slower growth. Inflation is likely to be affected by higher energy prices, but also by food prices as well as selected precious metals prices.
Trade with Russia has stalled due to sanctions and even if alternative sources are put into use, factors such as transportation and airline costs will cause high prices to be avoided. It should also be noted that many international companies will have to make operational and financial replanning due to the sanctions.
The United States, United Kingdom, and Mexico are close to equilibrium in oil production and consumption, and have little external dependence on access to local resources. As a result, they will feel more moderate adverse effects from higher oil prices.
Comparison of Brent oil, Dutch TTF natural gas prices and HRC finished steel index… Source: Bloomberg
Conclusion? Inflation is not only increasing in the short run, but fears of a bottleneck in the supply chain also increase long-term inflation expectations. Higher energy prices and lower business and consumer confidence will push economic growth below previous projections. It will be difficult for central banks to shift policy. Because monetary tightening cannot be postponed due to inflation, and they have to take into account the risks of economic growth based on geopolitical crisis. As long-term inflation expectations rise, the range of strain on this issue will increase and rate hikes will proceed more calmly and slowly.
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