The reality of Russia’s war on Ukraine has awakened the energy markets. Pre-market crude oil prices in the United States jumped to $130, a new 13-year high. This was despite headlines suggesting that Europe and America were considering a ban on Russian oil exports. Midday oil is at $119, but stock markets are still deep in red.
At midday, the Dow Jones Industrial Average ( DMIA) was down 1.9%, while the S&P 500 is down 2.2%, and the Nasdaq composite is down 2.3%.
Market experts predict that if oil prices rise above $130, and remain there, gasoline prices in the United States could reach $4.50 per gallon.
As the Russian invasion of Ukraine continues for its second week, traders are keeping an eye on oil and other commodities prices as well as the Federal Reserve interest rates.
Oil prices will continue to rise and gasoline prices could go up $0.30 to $0.40. This could also add about half a percentage point to the annual Consumer Price Index (CPI), which currently stands at 7.5%.
Uncertainty in the Stock Market over Oil and Fed Policy
The impact of Russia’s war on the economy is largely determined by the price of oil. High crude oil prices cause high inflation and slow down economies. At the March meeting of the FOMC, the Fed will also decide how aggressively to raise interest rates.
Experts had predicted these moves to reduce inflation. However, rising oil prices could make them questionable.
Loretta Mester, President of Cleveland Federal Reserve, stated last week that she still believes that a series of Fed rate increases is appropriate. She also said that she favours selling assets from the Fed’s balance sheet–a strategy known as quantitative tightening (QT). Separately, Raphael Bostic, Atlanta Fed President, called for several rate increases this year.
The Fed faces a difficult dilemma due to high inflation. Experts expect that the central bank will continue to raise the fed funds rate by quarter-point at its March meeting.
International Leaders Negotiate Tighter Sanctions against Russia
On Sunday, U.S. Secretary Antony Blinken said to reporters that the U.S. was discussing banning Russian crude oil imports with its European allies. This would have a major impact on the energy market’s mad rush. The White House also noted that it was working with Congressional committees to pass their own Russian oil ban legislation.
This would represent a significant increase in the already unimaginable sanctions the U.S. has already imposed on Europe.
In a research note, Victor Shum, vice-president of energy consulting at IHS Markit wrote that NATO members currently purchase more than half the 7.5 million barrels per day of crude oil and refined goods Russia exports. Shum cautioned that oil inventories in the United States are already low and at record levels in some parts of Europe, Asia.
Although oil prices are now well below their previous highs, Germany has indicated that it will not rush to impose new sanctions on Russian oil.
Christian Lindner, German Finance Minister, stated that we should not restrict our ability to support ourselves. Bild is a leading German newspaper. Separately, Annalena Baerbock, the German Foreign Minister, stated that a ban on Russian energy exports cannot be sustained for long.
Germany relies on Russian energy supplies for its energy needs. It imports an estimated 55% of its natural gasoline and 42% of its oil, and coal, from Russia.
Federal Reserve Plans to Increase Rates
It is becoming increasingly obvious that the Federal Reserve intends to raise the fed funds rates at its March 15-16 Federal Open Market Committee meeting.
The Fed is now faced with a serious dilemma. How can it raise rates while not threatening the economic recovery? Russia’s invasion in Ukraine has made the problem even worse for the Fed. Red-hot energy prices have exacerbated inflation and lowered the prospects for U.S. growth.
It is not clear whether the Fed can control inflation without sacrificing GDP growth.
“With inflation at an all-time high of multi-decades, the Fed is eager to get off of a crise footing,” stated Bill Adams, chief economist at Comerica Bank.