Released April 21, 2022 | SUGAR LAND
en
Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Inflationary pressures stemming from the economic recovery during the post-vaccination stage of the pandemic were already threatening the potential for further growth. Russia's decision to invade Ukraine means that threat is now a fundamental reality, the International Monetary Fund (IMF) stated.
Crude oil prices were accelerating last year on the back of a range of factors, from labor shortages and supply-chain bottlenecks to resurgent demand. The price for Brent crude oil, the global benchmark, spent much of last year in the mid-$70 range. But by the time an $80 floor was established during the fourth quarter, jitters about runaway inflation were apparent enough for policymakers to change gears and decide pressures were no longer transitory.
U.S. inflation by the end of 2021 was already at multi-year highs. The initial part of the new year was no different as post-vaccination optimism saw demand overwhelm supplies. But by then, some consumer prices were already becoming stifling. U.S. consumers, for example, do not like expensive gasoline, and those rising costs have political consequences.
From the Kremlin perspective, growing disunity among Western allies, pandemic and economic distractions, as well as a selective view of history, meant the time was right to restore Russia as a global leader. In late February, drawing on its need to have friendly regimes established in the so-called near-abroad, Russian military forces invaded Ukraine.
That, according to the International Monetary Fund, was the straw that could very well break the back of the global economy.
"The war adds to the series of supply shocks that have struck the global economy in recent years," the IMF's latest assessment reads. "Like seismic waves, its effects will propagate far and wide--through commodity markets, trade, and financial linkages."
Russia is a world leader in oil and natural gas production, while Ukraine is a staple provider of grains such as wheat. It is those commodities -- energy and food -- that accounted for the bulk of the inflation in the U.S. economy, the world's largest.
U.S. data through March show the cost for at-home food consumption was up 10% over the last year. Energy prices are up 32% over the 12-month period. All told, U.S. inflation is at 8.5%, the highest in 40 years.
As staggering as that seems on paper, the U.S. economy is far less sensitive to disruptions caused by the Russian invasion of Ukraine. The European economy is inextricably linked to Russia both by trade arrangements and pipeline infrastructure, making the pain much more severe.
"Commodity importers in Europe, the Caucasus and Central Asia, the Middle East and North Africa, and sub-Saharan Africa are most affected," the IMF stated. "But the surge in food and fuel prices will hurt lower-income households globally, including in the Americas and the rest of Asia."
And it may get worse before it gets better. The U.S. Energy Information Administration (EIA) observed that the average price for Brent crude oil shot up 20% from February levels last month, largely in response to the Russian invasion. Brent was trading around $108 per barrel on Wednesday, compared with $66 per barrel this time last year.
The EIA expects Brent to stay where it is during the second quarter, but it cools off to $102 during the second half of the year. It's not until next year that Brent is expected to fall below $100 to an expected average of $93 per barrel.
While that seems like relief is coming, you'd have to go back to 2014 -- almost a decade ago -- to find Brent crude oil at $90 per barrel for any sustainable stretch. Brent at $90-something is not cheap.
And with Russian military forces showing no signs of letting up, a lingering threat of recession is becoming more and more apparent. Economists at the Organization of the Petroleum Exporting Countries in their monthly market report for April revised their growth forecast for the global economy down, from 4.2% to 3.9%, due in large part to the war in Ukraine.
The world economy accelerated by 5.8% last year. OPEC expects that demand too will eventually suffer as a result of the compounding pressures on global growth.
Markets are nonetheless cyclical. Stein's Law, formulated by U.S. economist Herbert Stein, states that if something can't go on forever, it will stop. And since nothing is forever, the compounding strains on the global economy will eventually subside.
And yet, before the war, commodities were buoyed by the energy transition as investors pressed big oil companies to exercise capital discipline and pursue low-carbon options. That meant less investment upstream to the detriment of new global supplies.
That's changed too. U.S. shale oil producers are ramping up and finding new markets in Europe in response to growing Russian isolation. But that might not go on forever either. Energy major Shell plc (NYSE:SHEL) (London, England) said Wednesday that it was still able to meet many of its low-carbon goals and would continue to pursue a cleaner strategy going forward. "In a time of great uncertainty, it is vital that our long-term energy transition strategy remains on track," CEO Ben van Beurden said.
Should war end and energy majors pivot sharply back to the transition, we may be in a period of higher-for-longer crude oil prices. Stein's Law certainly holds, but there's no determining factor for how long current trends will last.
Industrial Info Resources (IIR) is the world's leading provider of market intelligence across the upstream, midstream and downstream energy markets and all other major industrial markets. IIR's Global Market Intelligence Platform (GMI) supports our end-users across their core businesses, and helps them connect trends across multiple markets with access to real, qualified and validated project opportunities. Follow IIR on: LinkedIn.
Crude oil prices were accelerating last year on the back of a range of factors, from labor shortages and supply-chain bottlenecks to resurgent demand. The price for Brent crude oil, the global benchmark, spent much of last year in the mid-$70 range. But by the time an $80 floor was established during the fourth quarter, jitters about runaway inflation were apparent enough for policymakers to change gears and decide pressures were no longer transitory.
U.S. inflation by the end of 2021 was already at multi-year highs. The initial part of the new year was no different as post-vaccination optimism saw demand overwhelm supplies. But by then, some consumer prices were already becoming stifling. U.S. consumers, for example, do not like expensive gasoline, and those rising costs have political consequences.
From the Kremlin perspective, growing disunity among Western allies, pandemic and economic distractions, as well as a selective view of history, meant the time was right to restore Russia as a global leader. In late February, drawing on its need to have friendly regimes established in the so-called near-abroad, Russian military forces invaded Ukraine.
That, according to the International Monetary Fund, was the straw that could very well break the back of the global economy.
"The war adds to the series of supply shocks that have struck the global economy in recent years," the IMF's latest assessment reads. "Like seismic waves, its effects will propagate far and wide--through commodity markets, trade, and financial linkages."
Russia is a world leader in oil and natural gas production, while Ukraine is a staple provider of grains such as wheat. It is those commodities -- energy and food -- that accounted for the bulk of the inflation in the U.S. economy, the world's largest.
U.S. data through March show the cost for at-home food consumption was up 10% over the last year. Energy prices are up 32% over the 12-month period. All told, U.S. inflation is at 8.5%, the highest in 40 years.
As staggering as that seems on paper, the U.S. economy is far less sensitive to disruptions caused by the Russian invasion of Ukraine. The European economy is inextricably linked to Russia both by trade arrangements and pipeline infrastructure, making the pain much more severe.
"Commodity importers in Europe, the Caucasus and Central Asia, the Middle East and North Africa, and sub-Saharan Africa are most affected," the IMF stated. "But the surge in food and fuel prices will hurt lower-income households globally, including in the Americas and the rest of Asia."
And it may get worse before it gets better. The U.S. Energy Information Administration (EIA) observed that the average price for Brent crude oil shot up 20% from February levels last month, largely in response to the Russian invasion. Brent was trading around $108 per barrel on Wednesday, compared with $66 per barrel this time last year.
The EIA expects Brent to stay where it is during the second quarter, but it cools off to $102 during the second half of the year. It's not until next year that Brent is expected to fall below $100 to an expected average of $93 per barrel.
While that seems like relief is coming, you'd have to go back to 2014 -- almost a decade ago -- to find Brent crude oil at $90 per barrel for any sustainable stretch. Brent at $90-something is not cheap.
And with Russian military forces showing no signs of letting up, a lingering threat of recession is becoming more and more apparent. Economists at the Organization of the Petroleum Exporting Countries in their monthly market report for April revised their growth forecast for the global economy down, from 4.2% to 3.9%, due in large part to the war in Ukraine.
The world economy accelerated by 5.8% last year. OPEC expects that demand too will eventually suffer as a result of the compounding pressures on global growth.
Markets are nonetheless cyclical. Stein's Law, formulated by U.S. economist Herbert Stein, states that if something can't go on forever, it will stop. And since nothing is forever, the compounding strains on the global economy will eventually subside.
And yet, before the war, commodities were buoyed by the energy transition as investors pressed big oil companies to exercise capital discipline and pursue low-carbon options. That meant less investment upstream to the detriment of new global supplies.
That's changed too. U.S. shale oil producers are ramping up and finding new markets in Europe in response to growing Russian isolation. But that might not go on forever either. Energy major Shell plc (NYSE:SHEL) (London, England) said Wednesday that it was still able to meet many of its low-carbon goals and would continue to pursue a cleaner strategy going forward. "In a time of great uncertainty, it is vital that our long-term energy transition strategy remains on track," CEO Ben van Beurden said.
Should war end and energy majors pivot sharply back to the transition, we may be in a period of higher-for-longer crude oil prices. Stein's Law certainly holds, but there's no determining factor for how long current trends will last.
Industrial Info Resources (IIR) is the world's leading provider of market intelligence across the upstream, midstream and downstream energy markets and all other major industrial markets. IIR's Global Market Intelligence Platform (GMI) supports our end-users across their core businesses, and helps them connect trends across multiple markets with access to real, qualified and validated project opportunities. Follow IIR on: LinkedIn.
