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Wednesday, March 9, 2022
With prices ‘unhinged,’ next stop could be $150 (or higher)
Uncle Sam is preparing to hit the Siberian bear where it hurts. And a lot of people will be feeling the pain.
On Tuesday, President Joe Biden vowed to do the previously unthinkable: ban Russian energy imports in response to its invasion of Ukraine. Although Russian oil comprises a slim 3% of U.S. oil stocks, spiraling energy prices hardly needed the additional impetus. Brent ended more than 3% higher above $124 per barrel, and gas crept further above $4 per gallon to their highest ever.
While the embargo will ostensibly cripple Russia’s finances as it continues a brutal frontal assault on Ukraine, the shockwaves — already cascading across energy, wheat (soon to become yet another source of food inflation) and nickel markets — will be felt everywhere. In a Yahoo Finance interview Tuesday, Commerce Secretary Gina Raimondo bluntly admitted that the invasion “isn’t going to be painless for anyone.”
So how high can oil go? Wall Street economists, already nervous about inflation and elevated demand that’s buttressing crude prices, are coalescing around a very specific magic number: $150 per barrel. But unlike the lottery, this one won’t win consumers any prizes.
“Soaring oil prices will worsen the near-term global economic outlook, by both slowing growth and boosting already high inflation,” Ben Laidler, global markets strategist at social investment network eToro. “The only silver-linings are that global growth is currently robust. Whilst ‘the solution to high oil prices is high oil prices’ as consumers are increasingly driven to cut demand by the surging cost,” he added.
Indeed, Moody’s chief economist Mark Zandi also warned $150 was the next stop. He argued in a Twitter thread that the U.S. needed to replace approximately 3 million barrels of oil per day “fast,” as inflation threatens to become “unhinged”
It’s a big surprise to me that the U.S. and others are self-sanctioning Russian oil. Over 3 million barrels a day of Russian oil needs to be replaced, fast. The Saudis and UAE have excess capacity, and there is Iranian oil. U.S. frackers will kick in. But all this will take time. pic.twitter.com/zNbSGnBNw9
— Mark Zandi (@Markzandi) March 8, 2022
In fact, $150 might be the conservative estimate, given that Moscow is threatening $300 (!!) per barrel. While that might be more Russian saber-rattling, Goldman Sachs easily predicts a few scenarios where things could get almost as bad.
Even if temporary supplies come in the form of emergency releases from OPEC and the strategic petroleum reserve (SPR), the bank’s scenarios still see Brent anywhere between $115 and $175.
"Given a still intensifying military conflict, escalating Western sanctions and growing isolation of Russia, our subjective probability weighting of these potential outcomes currently leaves us base-casing a 1.6 mb/d disruption,” the bank wrote.
“As a result, we are raising our 2022 Brent spot price forecast to $135/bbl, with our 2023 forecast at $115/bbl, up from $98 and $105/bbl respectively,” it added.
The good news: With the economy still expanding, paychecks fattening and jobs still plentiful, a recession is not (yet) a done deal.
“Surging oil prices can't singularly trigger a recession and it would take more than sky-high energy prices for the consumer impact to become recessionary,” said David Bahnsen, CIO at The Bahnsen Group, a wealth management firm with over $3.5 billion in assets under management.
“The big question now is what the plans are to replace Russian oil in American and European supply needs and then how effective an embargo may prove to be in de-escalating the military situation in Ukraine,” Bahnsen added.
With all its energy stocks, America is an oil and gas powerhouse — but as Yahoo Finance’s Rick Newman accurately noted on Tuesday, is still reliant on foreign energy in ways that cannot be undone overnight.
It’s partly why the Premier of Alberta — twisting the knife — suggested this week that it wasn’t too late to revive the Keystone XL pipeline project axed by the Biden administration on environmental grounds. Perhaps it's time the White House took him up on the offer.
Correction: U.S. needed to replace approximately 3 million barrels of oil per day. An earlier version incorrectly stated 3 billion barrels of oil per day.