Oil Could Top $200 a Barrel This Year, Traders Warn

Note to readers: The new Trends Journal will be released later today and will be packed with the latest trends in the Ukraine War, economy, and other topics. Consider subscribing here.

As Russian oil disappears from the world market and alternative energy sources are unable to make up the difference, crude oil prices may move well past $200 a barrel this year, a top hedger predicted.

“Wakey wakey,” Pierre Andurand told the Financial Times Global Commodities Summit in Switzerland last week.

“We are not going back to normal business in a few months,” he said. “I think we’re losing the Russian supply on the European side forever,” which could send crude prices to $250 a barrel, he warned.

SUBCRIBE TO THE TRENDS JOURNAL’S FREE SUBSTACK

Douglas King, director of RCMA’s Merchant Commodity Fund, pegs the price between $225 and $250 this year.

“This is not transitory,” he said to the FT. “This is going to be a crude supply shock.”

Russian diesel and other oil products will not return to Europe quickly, even after a ceasefire in Ukraine is enacted, other speakers at the conference agreed.

“Given the way things are, I don’t think this is a temporary problem,” Alok Sinha, chief oil and gas trader at Standard Chartered, told the FT. “You now have to deal with this as a long-term issue, which means you need to find alternative supply growth.”

The U.S. shale oil industry, which made the country a net energy exporter less than 10 years ago, will not solve the problem in the short term, according to Daniel House, senior oil trader at Socar in Houston.

“If they wanted to speed up [production], it’s a 12-month process” and 18 months for some producers, he pointed out in an FT interview. “The cavalry is not coming as quickly as it did previously when we had incentives for them to grow.

See more detail in “U.S. Oil Industry Will Not Raise Output, Executives Say” in this issue.

The price of oil would have to rise well beyond its current level before the shale industry could both fund added production and deliver investors their expected returns, King said.

Oil will reach $150 this summer, Trafigura trader Ben Luckock predicted and suggested that richer nations could offset part of the increase by reducing fuel taxes.

However, emerging nations will be less able to handle higher oil prices or fuel tax cuts, he noted, putting them in far greater danger of recession and debt default.

“These are going to be the people who suffer first and these are some of the unintended consequences of these policies that are likely to come,” he said.

TREND FORECAST: Oil at $150 a barrel or more will send the world lurching into a recession, far more dramatic as the one set off by the COVID War. 

Russia’s war in Ukraine and the sanctions attached to it are poised to cause massive hardship, poverty, and debt default not only among poor nations but also among businesses and households in developed countries.

As long as the Ukraine War ensues, and sanctions remain in place against Russia, as we have greatly detailed in the last two editions of the Trends Journal, the odds of a global recession increase, as will its severity.

RUSSIA OIL AND GAS BAN WOULD SPARK RECESSION, SCHOLZ SAYS

Banning Russian oil and gas imports into Europe now would throw Germany into a recession and “economic crisis,” chancellor Olaf Scholz told the country’s legislature on 23 March.

More than half of Germany’s natural gas and a third of its oil comes from Russia.

“To do that from one day to the next would mean plunging our country and the whole of Europe into a recession,” Scholz said.

“Hundreds of thousands of jobs would be at risk,” he warned. “Entire branches of industry are on the brink.”

Sanctions on trade already are damaging Germany’s economy and threatening jobs, he pointed out. “Sanctions must not hit European states more than Russian leadership,” he added.

The abrupt disappearance of Russian oil and gas would have “incalculable consequences” and set off “production disruptions, employment consequences, and, in some cases, massive damage to production facilities,” Sigfried Russwurn, president of BDI, Germany’s largest labor union, said.

“The European Union is not prepared for a short-term, comprehensive energy embargo,” he added. “It would jeopardize [European] unity and its ability to act economically and politically.”

Despite a fourth-quarter contraction, Germany’s GDP grew 2.9 percent last year and was expected to continue to expand as the COVID virus abated.

Now, partly because of the sanctions already in place, Germany’s economic growth will range from 2.2 to 3.2 percent this year, the country’s Ifo Institute said, reducing its earlier forecast of 3.7 percent.

Higher consumer prices will give shoppers €6 billion less in purchasing power this quarter alone, it calculated.

“The Russian onslaught is slowing the economy through a combination of significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products, and increased economic uncertainty,” Timo Wollmershauser, Ifo’s chief forecaster, said in a statement accompanying the revised forecast.

Inflation, which reached a multi-decade record 5.5 percent in January, also will rob consumers of value and could pass 7 percent later this year, according to the Association of German Banks.

TREND FORECAST: Because of the dire consequences of ending Russian oil deliveries to Europe, neither side will press for that. 

Cutting off Russian gas would crash Europe’s economy, so the West will let it continue to flow. Russia will not shut off the spigot because doing so would cast it as an even greater villain and give the West pretext to take even harsher measures against it.

IN EUROPE, REPLACEMENTS SCARCE FOR RUSSIAN GAS

About 40 percent of Europe’s natural gas comes from Russia, now a perilous source to rely on.

Earlier this month, Russia announced it would require European customers for its gas to pay for the deliveries in rubles, which would force the continent’s governments and utilities to deal with banks now sanctioned by the Western allies.

However, Europe is finding few alternatives.

The U.S. would like to send more gas but has virtually none to spare.

The gas is in the ground, but sending it to Europe first involves chilling the gas to a liquid in special compressors installed at customized shipping terminals. 

The chilled, liquefied natural gas (LNG) then must be compressed, pumped into pressurized tankers, and sailed to Europe, where specialized terminals must receive it and convert back to a gaseous form.

In recent months, U.S. processors have maximized their capacity to liquefy and ship gas and even have diverted some cargoes from Asia to Europe, although Europe lacks the facilities to receive more liquefied gas than it does now.

As a result, more than 75 percent of U.S. liquefied gas has gone to Europe this year, more than double the 34 percent that was shipped in 2021.

More terminals are being built on both sides of the Atlantic Ocean, but building a single terminal can take as long as five years.

Ten new European terminals are planned, spread across Belgium, Cyprus, Germany, Greece, Italy, and Poland, but most have yet to secure their financing. 

“In the near term, there are really no good options other than begging an Asian buyer or two to give up their LNG tanker for Europe,” Robert McNally, energy advisor to president George W. Bush, told The Wall Street Journal.

However, given time, the U.S. could do much more to help Europe wean itself from Russian gas.

In addition to pumping more gas and building more LNG terminals, the U.S. could provide loan guarantees to underwrite construction of new terminals in the U.S. and in Europe.

With other member governments, it also could require the World Bank and International Monetary Fund to prioritize funding of terminals and other relevant facilities.

For now, however, “Europe’s need for gas far exceeds what the [global] system can supply,” analyst Nikos Tsafos at the Center for Strategic and International Studies said in a WSJ interview. “Diplomacy can only do so much.”

TRENDPOST: Europe has drafted a ten-point plan to become less reliant on foreign sources of fuel and to boost renewable energy, chiefly through solar and hydropower, but also taking a new look at nuclear power. 

And, if money is invested in finding new alternatives rather than pumping trillions into the war machine, a new energy source may yet be created. 

A silver lining to Ukraine is the new sense of urgency around renewable energy, which can be produced domestically instead of imported from unstable countries, and the wider emphasis on our Top 2022 Trend of Self-Sustaining economies.

IN RUSSIA, STAPLE GOODS ARE RUNNING OUT

Despite government assurances that the economy is healthy and goods are plentiful, Russians are resorting to panic buying of everything from diapers to sugar to pet food as supplies run low and prices soar, Bloomberg reported.

A quarter of Russian shoppers are stocking up on non-perishables, assuming that they might not be available later, according to an internal Russian survey taken in mid-March.

Consumer spending in the country has shot up as much as 25 percent this month, compared to the month before Russia invaded Ukraine, data from Sberbank, Russia’s largest bank, shows.

Consumer spending makes up more than half of Russia’s GDP. However, the country is known for the shoddy quality of domestic products and Russians have preferred imports.

Now imported items are vanishing, as are local brands owned and made by international companies.

“Shop shelves are now full of sanitary napkins from brands I don’t know with names in Chinese characters, sometimes at double the price that Always or Libresse were just weeks ago,” one shopper told Bloomberg. 

Russian stores are limiting purchases of “socially important” food items after reports of hoarding surfaced. 

An online retailer reported the cost of office paper has soared fivefold in the last month, according to Bloomberg; the cost of medicines is up an average of 40 percent and more than 80 drugs have disappeared from pharmacy shelves.

“The sanctions shock to supply is pushing up prices much faster than we’d expect from the plunge in the ruble,” Bloomberg economist Scott Johnson said in an interview. 

“The initial burst might be driven by outright shortages as well as panic buying, but inflation could accelerate for months as the disruption ripples through supply chains,” he noted.

TREND FORECAST: As we have greatly detailed in three previous editions of Trends Journal, the sanctions being imposed upon Russia are not going to change their War direction, but will instead inflict severe economic and inflationary damage not only the Russian people... but the We the People of the world. 

WAR COSTS RUSSIA 15 YEARS OF ECONOMIC GROWTH, IIF WARNS

Russia is on course to wipe out the last 15 years of economic growth—about half of its post-Soviet expansion—by 2023 because of its Ukraine invasion and resulting Western sanctions, the Institute of International Finance (IIF) reported.

Russia’s Ukraine invasion prompted the collapse of the ruble and the mass exodus of international manufacturing and consumer companies.

The nation’s economy will shrink 15 percent this year and 3 percent in 2023, according to IIF calculations, putting Russia’s GDP at its 2007 level. 

Any additional sanctions would make the contraction worse, the report noted.

“Sharply lower domestic demand is likely to play a crucial role while a collapse in imports should offset lower exports, leading to a marginally-positive contribution from net foreign demand,” the report said. 

“However, should further sanctions in the form of trade embargos be implemented, exports might fall more than we currently forecast.”

Even after the conflict reaches a settlement or stasis, the invasion’s impact will linger for years, the IIF predicted.

The West is likely to continue bans on sensitive technologies that China alone will not be able to entirely offset. Russia’s educated middle class will seek to emigrate in search of more fulfilling economic futures, creating a proverbial “brain drain.” 

Also, foreign companies are unlikely to flock back to an economically decimated Russia, leaving both the consumer and manufacturing sectors weakened, perhaps for a decade or more.

“The negative effect on medium- and long-term economic prospects could be even more important,” the IIF report cautioned. 

U.S./NATO MOVE TO BLOCK RUSSIAN GOLD SALES

In a NATO meeting at the end of last week, Western allies again emphasized that any transactions involving gold belonging to or controlled by Russia’s central bank falls under existing sanctions and is not permitted.

“We are taking steps to make sure there is no leakage, no sale of their bullion into markets around the world,” British prime minister Boris Johnson said in a public statement.

The bank owns about 2,000 tons of gold, worth around $140 billion, the world’s fifth-largest gold cache. Much is held in banks and other depositories outside Russia.

Sanctions on Russia already ban gold transactions, but tracing sales through the physical market can be difficult and NATO said there were signs that Russia’s central bank was trying to maneuver around the sanctions to “prop up the ruble.”

Gold makes up about fifth of Russia’s foreign exchange reserves, The Wall Street Journal reported. The balance is in dollars, euros, and yuan, according to central bank data.

The sanctions, imposed late in February when Russia attacked Ukraine, have cut off the country’s access to about half its foreign currency reserves, Russia’s finance minister said.

The allies continue “sharpening and shaping” the sanctions as Russia continues to seek ways to evade them and fund its war on Ukraine, one official said in a comment quoted by the Financial Times.

The European Union will discuss the sanctions in a summit with Chinese president Xi Jinping, scheduled for 1 April.

TREND FORECAST: We forecast that Russia will bypass these gold sanctions when dealing with its favored nations such as India, China, Pakistan, etc., and will fight and win to get its gold reserves and monetary assets that are being frozen by the U.S. and other central banks. 

WAR CUTS WORLD’S FERTILIZER SUPPLY, ENDANGERING YIELDS

Russia has been the world’s largest producer of fertilizer.

Now, with Western sanctions banning trade with the country, the global supply of fertilizer has imploded and prices have reached record levels, as much as four times what they were in 2020, just as a new planting season is getting underway, The Wall Street Journal reported.

Natural gas is a feedstock in fertilizer’s manufacture. When oil and gas prices rose last year, so did those of fertilizer, squeezing farmers’ budgets around the world.

Fertilizer shortages are likely to continue indefinitely, producers said. When Russia invaded Ukraine and natural gas prices soared, many European factories stopped making ammonium, a gas-based ingredient in fertilizer.

Europe’s gas prices remain about 40 percent higher than before the invasion.

Less fertilizer means smaller harvests for most growers, pinching global food supplies in the midst of an ongoing commodities shortage and rising food prices.

Poorer nations will be hit particularly hard, with governments having to import staples such as wheat at a time when global food prices already set records in February, according to the U.N. Food and Agriculture Organization.

“The violent conflict in Ukraine will be a tragedy for the world’s poorest people who cannot absorb the price hikes of staple foods and farming inputs that will result from disruptions to global trade,” Gilbert Houngbo, president of the U.N. International Fund for Agricultural Development said in a public statement last week.

TRENDPOST: This is another instance of Western sanctions against Russia damaging people around the world, especially those least able to cope with these losses. Again, we have detailed the economic damage that will be inflicted across a spectrum of commodities in the three previous editions of the Trends Journal. 

CHINA SEES MASSIVE CAPITAL FLIGHT SINCE UKRAINE INVASION

Foreign investors have yanked money out of China’s stock and bond markets on an “unprecedented” scale since the Ukraine war began, the Institute of International Finance (IIF) reported.

“Outflows from China on the scale and intensity we are seeing are unprecedented, especially since we are not seeing similar outflows from the rest of emerging markets,” the IIF said in a statement announcing its findings. 

“The timing of outflows, which built after Russia’s invasion of Ukraine, suggests foreign investors may be looking at China in a new light, though it is premature to draw any definitive conclusions in this regard,” the statement added.

Foreign investors bailed out of Chinese government bonds in February at the largest volume on record, according to government data, Bloomberg reported.

Because sanctions had frozen Russia’s assets held in Western currencies, bondholders might have been worried that the Kremlin would start selling its Chinese assets to raise cash to stabilize its economy and fund its war.

Initially, investors also were concerned that China’s involvement with Russia might bring the West’s sanctions to China as well. 

China’s equity markets tumbled on those fears but have now rebounded after China made public assurances it would not aid Russia’s war effort. 

The massive exit from China’s bond market probably means that investors are waiting on the sidelines until “greater clarity emerges on the Russia crisis,” Padhraic Garvey, ING Financial Markets’ chief of bond and rate strategy, told Bloomberg.

TREND FORECAST: With China’s largest city, Shanghai, in a rolling lockdown to fight the COVID War and its real estate market sector in turmoil, a sudden shock from an unexpected source or sector could crash its shaky equity markets and weaken its economy. 

As reported by Bloomberg earlier this month:

 “The Hang Seng Tech Index’s has plunged 20% in dollar terms since the advent of new regulation in mid-February, double the losses witnessed in the broader developing-nation benchmark. 

“That’s sent the tech gauge’s ratio relative to emerging markets to the lowest level since 2019. A group of consumer stocks including Alibaba Group and Meituan is one of the worst drags on the index, data compiled by Bloomberg show.”