• Add

Oil prices go ballistic as Ukraine crisis deepens


Oil prices go parabolic, climb almost 20% this week as sanctions bite

Dollar and yen advance, gold shines, yields crumble, stocks retreat

Coming up - Ukraine peace talks, Powell testifies, OPEC and BoC meet

Energy market in turmoil

The war in Ukraine has unleashed havoc on financial markets, with some of the most liquid securities on earth trading like penny stocks lately as nervous traders scramble to either hedge their risk exposure or liquidate assets. Oil prices are the perfect encapsulation of this paradigm shift.

The crushing sanctions imposed on Russia have left energy traders desperate to secure as much supply as possible before the shortage intensifies, which has sparked a rally of epic proportions. Oil prices have risen almost 20% this week alone, going ballistic yesterday after several nations agreed to release some of their crude reserves - a move that the market clearly thinks will be inadequate.

This is the second time in recent months that releasing strategic reserves has backfired by propelling oil prices higher. The underlying message is that traders want to see permanent supply increases, like a faster normalization of OPEC production or Iranian output coming back online. Otherwise, it’s difficult to expect a reversal of this supply shock.

OPEC+ will meet today. So far there has been no indication the producers are willing to raise output faster, but that was before prices exploded 20% higher in two trading sessions. That said, Russia is also part of this alliance, which complicates matters further by adding a geopolitical dimension to the negotiations. If OPEC+ doesn’t step up its game, energy prices could keep grinding higher.

Safe havens shine bright

The rotation towards safety was evident in every market. Portfolio managers are loading their books with defensive assets, buying truckloads of government bonds and gold to weather out this storm.

Bond markets experienced some of the most violent moves in years, with yields falling dramatically as some leveraged funds apparently threw in the towel on bets for aggressive central bank normalization. Even though inflation expectations are surging, there’s a growing belief the Fed won’t dare to tighten aggressively in the midst of a geopolitical crisis.

With inflation expectations soaring but Fed bets being dialed back, the result is that real yields have imploded, which is the perfect recipe for a rally in gold. This allowed bullion to charge higher yesterday in defiance of the stronger US dollar, before it encountered resistance near the $1950/ounce region.

FX outlook and upcoming events

In the FX space, it’s been a classic case of traders running to the hills. This crisis has been a perfect storm for euro/dollar, which sliced lower today to resume its broader downtrend. Demand for the reserve currency has gone through the roof as investors prioritize protection over everything else, something also evident in the Japanese yen and Swiss franc.

Meanwhile, the euro has been left to drown amid fears that the sanctions will inflict serious damage on the European economy, as spiraling energy prices squeeze consumers and the banking sector suffers thanks to its exposure to Russian money.

As for today, there’s a ton of crucial events. Ukraine and Russia are expected to make another attempt at a ceasefire, although expectations are very low given the escalation in recent days, with the Ukrainian leader accusing Moscow of war crimes. In Canada, the central bank will meet and money markets imply an 80% chance for a rate hike.

But perhaps most importantly, Fed Chairman Powell will testify before Congress. He is faced with an impossible situation. Lawmakers of both parties will grill him about soaring prices, the latest business surveys and energy prices suggest there’s more inflation in the pipeline, and yet the markets are dialing back bets for tightening. Someone has to be wrong here.

We’ll find out today what really scares the Fed - geopolitical uncertainty or spiralling inflation?

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-oil-prices-go-ballistic-as-ukraine-crisis-deepens-156076
!"#$%&'()*+,-./0123456789:;<=>?@ABCDEFGHIJKLMNOPQRSTUVWXYZ[\]^_`abcdefghijklmnopqrstuvwxyz{|} !"#$%&'()*+,-./0123456789:;<=>?@ABCDEFGHIJKLMNOPQRSTUVWXYZ[\]^_`abcdefghijklmnopqrstuvwxyz{|}