Policy makers are facing fresh headaches in the wake of the Kremlin’s decision to go to war, with oil and gas prices, which were already high, shifting up a gear. This provokes fears that inflation – also at multi year highs and still climbing – could reach catastrophic levels. A knee-jerk reaction could crater economic recovery with many sectors already reeling from supply-chain issues, cost increases, rising energy bills and the fallout from the pandemic.
The cost of crude oil was pushed to its highest levels in eight years, something which further pushes the impact of the conflict onto other nations around the world. Given Russia’s status as one of the world’s key oil producers and exporters, analysts fear the cost per barrel will continue to increase, with some suggesting steep price rises could be inevitable if the invasion of Ukraine continues for a prolonged period.
Commodities analysts at Capital Economists said, “Russia accounts for about 10% of global crude oil exports, about 50% of European coal imports, and about 30% of European natural gas imports. The latest twist in the Russia-Ukraine crisis is likely to keep commodity prices elevated over the coming weeks and months. If the situation spirals into a more serious and wide-ranging conflict between Russia and the West, commodity prices could rise further from here.
“Brent crude oil is now trading at well above £74 ($100) per barrel, and we think concern about Russian supply will keep prices around this level over the next few months. What’s more, if the situation were to escalate and Russia’s oil exports were choked off altogether, we could see oil prices trade in a range of £89 – £104 ($120–$140) per barrel.”
The potential disruption to oil supplies is matched with fears about gas supplies and other critical materials such as food stuffs and palladium which is vital to key industries such as car manufacturing. TD Securities says this too could cause new inflation pressure, with analysts explaining “A significant disruption to palladium supply could impact auto production, which has been a pain point fuelling inflation concerns.”
Win Thin, who is the Global Currency Strategy Head at BBH said that markets could be taken back to the dark years of the 1970s, with persistent and sustained periods of volatility wreaking havoc. “Markets should be braced for an extended period of high volatility, high commodity prices, and rising risks of stagflation globally … Anyone who lived through the 1970s will recall the difficult times brought about by not one but two oil shocks.”
Economic turmoil, risk off appetite and rising inflation make gold a more attractive, and vital, portfolio hedge than ever and, circumstances suggest that pricing will continue to sharply appreciate. Don’t delay. Buy now.
