In the midst of the Ukraine war, oil became more than a commodity. Oil has embraced a new role of negotiation tool within the geopolitical arena. The embargo on oil exports inflicted by the United States on Russian producers underlines that we are in the middle of a fully-fledged economic war. Oil and energy prices are the main weapons of this conflict. What will be the price of the war? Will oil prices rise above USD 300?
The world is on the brink of nuclear war, and the only efficient deterrent used by the western allies against the Russian Federation is the oil embargo.
On the one hand, the United States is in a better position because it has sufficient reserves, including fracking, to ensure its needs and cut the imports of Russian oil.
On the other hand, the European Union depends massively on Russian oil and gas. Cutting Russian imports will come at a cost for the European economy and the Euro.
Moreover, the European agenda around renewable energies and the progressive switch from fossil to green energy may need to be postponed. Currently, the easiest way to curtail the dependency on Russian oil and gas is to revive the European coal sector, which was long forgotten.
Everybody will pay the cost of the war in Ukraine, and the perspectives of hyperinflation fueled by high oil prices are real. Oil prices reached their climax in 2008 before the credit crunch, but we could easily witness Brent going above USD 300 amid a prolonged conflict in Ukraine and a reluctant OPEC.
[If we] increase the speed by which we transit to renewables, combined with increasing our energy efficiency, combined with diversifying our energy resourcing, by the end of this year already we could have decreased our dependence on Russian gas by two-thirds.Creating your own energy resources is the smartest and most urgent choice” to ensure security of supply. One could imagine you stick with coal a bit longer but only if you speed up the transition to renewables. Frans Timmermans, European Green Deal commissioner
Nasdaq ended the week below 12,850 points, building up a negative momentum and consolidating its bearish trend. While investors seem to pull back from the stock markets, the macroeconomic data delivers more bad news. For February, the US inflation figures show a new 40-years high, pushing the official consumer purchase index near an 8% growth.
It is only a question of time until leading economics will move into double digits inflation. The changes in policy from central banks may not help curb inflation because the new wave of inflation is generated by commodity shortage and not by excess cash.
Oil prices went through an unprecedented rally in the days following the Russian invasion of Ukraine. With Brent trading above USD 130, oil reached the highest levels since 2008. While the United States managed to reduce Russia’s footprint in its energy balance, the European Union is in a different situation. In fact, the Russian Federation supplies 40 per cent of the European Union’s gas, with Italy, Germany and a few central European countries particularly reliant. Russia also provides about 25 percent of Europe’s crude oil.
The European Union is looking for alternatives to Russian supplies. But Norway, Algeria and LNG imports do not suffice in the long run to completely switch from Russian oil and gas.
This unique weak position of the European Union is the key levy that could trigger a strong rally on oil prices.
The stock market is dwindling, the oil prices are booming and inflation is reaching two digits territory. Nevertheless, the leading volatility index is far from reaching alarming levels. VIX climbed shortly near 38%, far from the peak recorded during the pandemic outbreak. Markets are underpricing volatility for counterintuitive reasons. The tensions will accumulate in the market, and they will finally unleash the volatility will spike to unforeseen levels.
The interest rate hikes and the assets repurchase tapering will bring more turmoil in the market, and trading on low volatility will become impossible.
For a few days, we believed in seeing the decoupling of Bitcoin from the narrative of main traditional markets. The new sanctions against Russian oligarchs and the ban of leading Russian banks from SWIFT, were supposed to revive Bitcoin’s role as a tool to bypass the traditional fiat system. For the moment, there are no signs of a Bitcoin rally, the leading cryptocurrency holding above USD 39,000.
President Biden announced the creation of a digital Dollar that could be similar to Bitcoin. The announcement is a double edge sword. On the one hand, it can bring momentum to the crypto market, and on the other hand, it could wipe out crypto.
After a bumpy ride marked by a few significant swings, the Dow Jones Index ended the week into negative territory, below 33,000. The war between Ukraine and Russia ignited the market turmoil and triggered a long-run bearish pattern.
Bitcoin ended the week above USD 39,000. The war in Ukraine and the interest rate hike could generate new price corrections, and Bitcoin could test the USD 30,000 level over the next month.
The Gold ounce ended the week on a negative note, below USD 2,000 after climbing above USD 2,070. The foreseeable commodities crisis and the inflationary context are good arguments for a rally in gold prices.