Pre-market inventory: Oil prices fell 30% in one week. Which give?

What’s happening: The unusually sharp pullback was driven by hopes that Saudi Arabia and the United Arab Emirates could boost oil supply and China’s demand could fall due to new coronavirus restrictions in the big cities. This would ease the pressure on the market.

Yet analysts warn that we are not out of the woods yet. Oil is still trading well above what it costs to produce it, and extreme swings are likely to persist at a time of enormous uncertainty.

“I wouldn’t rule out $200 a barrel just yet,” Bjørnar Tonhaugen, head of oil markets at Rystad Energy, told me. “It’s too early.”

After the invasion, oil prices soared as traders began to view Russian crude exports as untouchable. This has raised concerns about how this 4-5 million barrels per day supply could be replaced, especially as fuel demand increases over the summer.

Over the past week, however, investors seem to be wondering if they have gone too far, too fast. The United Arab Emirates’ the ambassador in Washington said that the country wants to increase oil production, raising hopes that the Organization of the Petroleum Exporting Countries, or OPEC, may eventually step in. Meanwhile, Russia and Ukraine are still talking to each other, even as war rages on.

Additionally, China’s commitment to halting the spread of Covid-19, which has led to a lockdown of the tech hub in Shenzhen and new rules in Shanghai, could mean the country needs less energy at home. short term. China imports around 11 million barrels of oil per day.

“People remembered that we are still in a pandemic,” Tonhaugen said.

Why it matters: Lower oil prices have helped keep gasoline prices from rising in the United States. They’ve stopped climbing for now, though a gallon of gas still costs nearly $4.32 on average.

While $100 a barrel of oil is still extremely expensive, if prices stay within this range, it could allay some fears of accelerating inflation. Decision makers would probably breathe a small sigh of relief.

But it’s clear that investors remain unsettled as they deal with the effects of the Russian invasion. Russian oil is still priced at a huge $26 discount to Brent.

And analysts believe the direction of travel has been set. UBS analyst Giovanni Staunovo expects oil to trade at $125 a barrel by the end of June. For his part, Rystad Energy’s Tonhaugen thinks prices could still break records as the dispute unfolds.

“It’s the calm before the storm,” he said.

Chinese stocks sell-off intensifies

Investors rushed to dump shares of Chinese companies as worries grow over the consequences of a crackdown by regulators and a spike in Omicron cases. That Beijing could provide support to Russia and be punished by the West for it adds to the fear.

“There may be growing caution about the potential for secondary sanctions against China,” TD Securities strategist Mitul Kotecha told clients.

The Shanghai Composite fell almost 5% on Tuesday. Hong Kong’s Hang Seng fell almost 6%. The index has plunged more than 10% in the past two trading sessions.

The declines occurred despite surprisingly positive economic data from China on Tuesday. Retail sales rose 6.7% in the first two months of this year compared to the same period in 2021. Industrial production jumped 7.5%, beating economists’ forecasts.

“The momentum of China’s economic recovery improved in January and February, laying a solid foundation for a strong start to the first quarter of this year,” a National Bureau of Statistics spokesperson said.

But as China battles its worst Covid-19 outbreak in two years, investors see little reason for optimism.

“With authorities abandoning targeted containment measures in favor of wholesale shutdowns, this could be even more disruptive than last summer’s Delta wave, which led to a sharp contraction in economic output,” Julian Evans wrote. – Pritchard of Capital Economics on Tuesday.

That’s not the only reason investors are nervous. Tech giant Tencent could face a record fine for breaking China’s anti-money launch rules, sending its shares into a tailspin. Other big tech names like Alibaba have been battered after the Securities and Exchange Commission continued its crackdown on foreign companies that fail to meet U.S. disclosure requirements.

Could a Russian default happen tomorrow?

Russia could be on the on the brink of non-compliance with external debt obligations for the first time since 1918 following the Bolshevik Revolution.

The latest: Half of the country’s foreign exchange reserves – around $315 billion – were frozen by Western sanctions imposed after the invasion of Ukraine. As a result, Moscow will reimburse creditors of “hostile countries” in rubles until the sanctions are lifted, according to the Russian finance minister.

Rating agencies would likely consider Russia to be in default if Moscow misses payments or repays debt issued in dollars or euros with other currencies such as the ruble or Chinese yuan, reports my CNN Business colleague Charles Riley. .

That moment could come as early as Wednesday, when Moscow will have to pay $117 million in interest on dollar-denominated government bonds, according to JPMorgan Chase. Although Russia has issued bonds redeemable in multiple currencies since 2018, these payments must be made in US dollars.

Why it matters: A default could drive the few remaining foreign investors out of Russia and further isolate the country’s crumbling economy.

Other potential consequences are difficult to assess. The 2008 global financial crisis, which was triggered by the collapse of Lehman Brothers, showed how quickly negative shocks can spread throughout the entire financial system and global economy.

“The Russians will not be the only ones to suffer from Russian sanctions”, Patrick Jenkins of the Financial Times written this week. “The world should remember Lehman.”

following

The US Producer Price Index, a key gauge of inflation, shows at 8:30 a.m. ET.

Coming tomorrow: The Federal Reserve is expected to start raising interest rates for the first time since the pandemic hit in 2020.


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Felix J. Dixon