new York Discussions about stopping Russian oil imports pushed the price of crude oil up to $139 a barrel at the start of trading in Asia on Monday night. This triggered a sell-off on Asian stock exchanges.
In Japan, the largest financial market in Asia, share prices fell by almost four percent on Monday morning, while the price of gold and, above all, the yen, which has been weak up to now, rose significantly against the dollar and euro. In crises, Japan’s currency is considered a safe haven to which investors flee.
South Korea’s Kospi index also fell by more than two percent, and Hong Kong’s Hangseng index by more than three percent. Not even China’s new growth targets could reassure investors.
The National People’s Congress had specified at the weekend that the economy should grow by 5.5 percent despite the bursting of the real estate bubble. After a slow start, the Shanghai Composite Index lost more than one percent in value. Because many observers consider China’s goals to be too ambitious.
Sean Darby, chief strategist at the investment house Jefferies, judges: “The background is slowing economic growth.” In the second quarter, both consumer and corporate sentiment are likely to deteriorate. “Even if there is a small group of winners in commodities, most equity indices will tremble under the twin shocks of higher input costs and falling orders,” Darby said.
The oil price shock triggers recession fears
The price of oil in particular worried the markets on Monday. The price of Brent oil, meanwhile, rose 18 percent to $139 a barrel before falling back to around $130. The price of oil is thus approaching its record high from 2008 at $147.50 per barrel. Last week alone, the Brent price rose by 21 percent.
Should the West impose an import ban on Russian oil, it would be a “massive shock to global markets,” warns Ethan Harris, an economist at Bank of America. The nervousness on the markets was clearly noticeable on Monday night.
US Secretary of State Antony Blinken said in an interview with CNN on Sunday that the US and its Western allies are currently discussing ending oil imports from Russia. “It’s a very active discussion,” Blinken said.
Russia is the third largest oil producer in the world. Most recently, the country exported between 4.5 and 5 million barrels per day on average. This corresponds to around five percent of global oil consumption. According to the International Energy Agency, there are also up to 2.8 million barrels per day of processed products such as petrol and diesel.
That amount of crude oil and fuel is not easily replaceable, says Chris Wheaton, an analyst at investment bank Stifel. A boycott of Russian oil could send the price to an unprecedented $200 a barrel. “The price of freedom is $200 a barrel of crude oil — that’s what it could cost if the world stopped using Russian oil,” Wheaton writes in a recent study.
World economic recession could be imminent
Harris of Bank of America believes that this could cost the US economy two percentage points of growth. In order to replace Russian oil, a number of factors would have to come together: A relaxation of sanctions against Iran could bring Iranian oil back onto the world market, the Stifel analysis goes on to say. Unused oil production capacities, for example in Saudi Arabia and the United Arab Emirates, would have to be fully utilized.
In addition, the US shale oil industry would have to drill more. The price of oil would also have to rise so high that demand would fall – as a result, this would mean a recession in the global economy. Analyst Wheaton estimates that oil demand could fall by 2 to 3 percent at a price of $200. Such a slump in oil demand triggered by high prices last occurred in mid-2008 during the global financial crisis, Wheaton continued.
The reluctance of many oil traders to buy Russian oil is already making the raw material extremely scarce. Analyst firm S&P Global Platts estimates that self-restraint by many traders is likely to cut Russian oil exports by an average of one to two million barrels a day in March.
The buyers’ strike is reflected, among other things, in historically strong price reductions for Russian Urals oil on the world market. The Shell oil company faced massive criticism at the end of last week because the company had bought a Russian oil shipment. Shell justified the purchase with the security of supply in Great Britain. The company promised to donate all profits from the deal.
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USA is looking for alternatives
Meanwhile, according to media reports, the US government is trying more and more desperately to find alternatives to Russian oil on the world market. According to the news portal “Axios”, US President Joe Biden is considering a trip to Saudi Arabia to mend relations with ruler Mohammed bin Salman and to persuade the kingdom to increase oil exports.
According to the Wall Street Journal, members of the US government are even scheduled to meet with Venezuelan officials to negotiate the replacement of Russian oil exports. Congressional elections are coming up in the US in November – and fuel prices are constantly reaching new heights in the US and in Europe alike.
Independent capital markets consultant Ed Yardeni expects a phase of stagflation in the US, with persistently high inflation and lower growth. “Even a recession can no longer be ruled out, given the jump in oil prices,” he points out.
“For equity investors, 2022 will be one of the toughest years of this bull market.” Yardeni has already scaled back his expectations for the S&P 500. He expects the broad stock index to end the year at 4,000 points. That would be another eight percent less than the closing price on Friday and a minus of 16 percent from the recent record high. In this environment, Yardeni recommends buying energy and financial stocks in particular.
Tesla boss Elon Musk also got involved in the discussion about rising energy prices. “I hate to admit it, but we need to increase oil and gas output immediately. Extraordinary times require extraordinary measures,” wrote the CEO of the electric car group on Twitter on Friday. While that’s bad for Tesla, “sustainable energy sources just can’t immediately replace Russian oil and gas exports.”
Japan stocks face double shock
The impact of rising oil prices and falling growth prospects weighed on the stock market on Monday. As the market plummeted, fueled by export-oriented stocks, investors pushed the share price of Japanese oil company Idemitsu up nearly 6 percent.
The Nikkei 225 index, which measures movements in Japan’s 225 largest stocks, fell 3.2 percent by midday. And the bottom is not yet in sight in Japan, my investment experts.
First, Japanese stocks always need a tailwind from the global economy, since 60 percent of corporate profits come from abroad. Second, international investors, especially Americans, would dry their foreign investments home.
At the same time, the flight of investors to the supposedly safe haven of the yen is further depressing earnings prospects. Because the stronger the yen becomes, the lower the foreign profits of companies are due to the conversion into Japan’s national currency. Against the dollar, the yen was up 0.4 percent to below 115 yen against the dollar by 10:25 a.m. local time, and against the euro it was up 2.1 percent to 124.50 yen. That was the strongest yen and weakest euro since January 2021.
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