Australia may be a long way from the devastating conflict unfolding in the Ukraine but that does not mean we’ll get off unscathed.
Petrol prices as high as $2.10 a litre are a real possibility, according to Dr Vlado Vivoda, who is senior lecturer in strategic studies at Deakin University.
Oil prices sprung up to US$105 a barrel following Russia’s invasion but the price has since simmered back to under US$100.
Vivoda’s prediction was based on JP Morgan’s forecasts of oil reaching US$125 a barrel, made before the invasion and based on other factors such as the return of International travel.
“So this just adds fuel to the fire,” Vivoda said.
What happens next largely boils down to sanctions enforced by the West and if the situation escalates beyond Ukraine.
CBA analyst Vivek Dhar said it was not in the interests of the US, UK and the EU to put sanctions on oil and gas exports.
“That’s simply because it will hurt them quite severely, particularly given the state of energy markets at the moment,” Dhar said.
“That’s seen as a last resort.”
Dhar said there was likely to be disruption to the oil supply flowing through Ukraine - which is only 0.25 per cent of global oil production.
He said investors were more worried that Russia’s oil exports - which account for around 8-8.5 per cent of global supplies - may be cut off.
“While that would cripple Russia’s export revenue, it would weigh on global growth and potentially even risk recession in Europe.”
Dhar said Australians would feel a “double whammy” impact on energy prices if the conflict escalated.
“Oil prices will lift and so will the US dollar, which will feed into higher petrol prices at the bowser,” he said.
“Australia is relatively insulated from all the geopolitical risks right now. But when we talk about the direct effect, I would say it's petrol prices and what happens with the Aussie dollar that will be key in the short term.”
Hold your nerve
AMP Capital’s chief economist, Shane Oliver, said the defensive parts of the share market, such as consumer staples, health care, and probably energy stocks, would likely see a benefit.
“[The] trouble is, for most investors, it's very difficult to time the market,” Oliver said.
“We know with these sorts of events that there's the initial market knee-jerk reaction - shoot first and ask questions later.”
He said that if the situation remained confined to Ukraine, there was no NATO troop involvement and gas supplies continued to flow through to Europe, “markets will soon find a bottom”.
He said this could happen in the next few days or even weeks.
“Then you'll get some sort of bounce back and to time that is going to be very difficult for most investors,” Oliver said.
“For most investors, with their superannuation and so on, it's probably better to stick to the strategy that they’ve been working with rather than to try to time geopolitical events.”
He added that, historically, markets recovered from major crises events like this after taking a short-term hit.
Oliver said Australia didn't export much to Russia so sanctions weren't going to have much impact on the country.
He said the reason Australia was applying sanctions was to show unity with like-minded governments.
What about wheat?
Rabobank agricultural analyst Dennis Voznesenski said Australian wheat exports would experience increased demand if Black Sea exports were unavailable.
The Black Sea region accounts for 34 per cent of global wheat exports, he said. A full-scale conflict between Russia and Ukraine will see exports out of the region grind to a halt, at least in the short term.
“And if sanctions are implemented on Russian wheat exports, it will cause long-term structural changes to wheat flows,” Voznesenski said.
He said Australian wheat exporters would likely not see the full upward impact of the global price rise due to Australia’s recent large harvest, limits on our export capacity and the positive grains outlook for the coming 2022 Australian season.
“Assuming a full-scale conflict, with a virtual halt to Black Sea exports – and that basis [the difference between Australian and US wheat prices] remains constant – local Kwinana Free-In-Store APW prices could rise from $367/tonne currently to $425/tonne in the near term,” Voznesenski said.
“And if Black Sea wheat is unavailable by July, whether due to continued conflict or sanctions on Russian wheat exports, prices could rise significantly higher.”