The inflationary risk markets are ignoring, but shouldnt – Yahoo Finance

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Tuesday, February 8, 2022

Geopolitics are pushing oil toward $100, and thats a problem for inflation

Ukraine and OPEC have become inflation risks of sorts.

And Wall Street, preoccupied as it has become with a host of other issues like interest rates, earnings and economic growth, has yet to fully appreciate why they matter.

Investors havent been paying much attention to the crisis in Eastern Europe, which is just one of several geopolitical flash points menacing a world thats still in the clutches of COVID-19. However, oil is emerging as a barometer of concerns like a potential Russian invasion of Ukraine, and an oil cartel thats burned through spare capacity.

As if we needed any more sources of price pressure, crude is inching closer and closer to $100 per barrel and analysts are warning the balance of risks will make it very easy to breach that psychological barrier, Yahoo Finances Ines Ferre reported on Monday.

Regarding Ukraine, the biggest fear is that an incursion by Russia will force the hand of the United States, raising the specter that a cold war with Moscow could easily turn hot.

"The U.S. wants to make it clear that Washington and its allies are absolutely prepared if it comes to a major military escalation, Eurasia Group senior analyst Zachary Witlin told Yahoo Finance Live in a recent interview.

At least for now, that remains a low probability. However, the potential for other spillover effects like an energy supply crunch that dents Europes recovery, to an armed conflict that disrupts the operations of multinational companies remains a very real and present danger. With energy prices already elevated, the Russia scenario could easily add to upward pressure that would translate into higher prices, and at the worst possible time.

Last week, Mondelez Internationals CFO told Yahoo Finances Brooke DiPalma that the company was concerned about its employees in the region. Russia may account for an estimated 10% to 11% of Mondelez's European Union (EU) segment, and approximately 3% of its total sales in 2022, Piper Sandler recently estimated.

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"As long as the Russians are threatening to move into Ukraine, [the crude oil] market's going to stay bid," Bob Yawger, Mizuho Americas executive director, told Yahoo Finance Live recently. If Russias oil is "sanctioned or there's trouble moving barrels... that's going to be a major problem"

And we havent even begun to scratch the surface of whats happening in the Middle East and OPEC, whose meetings used to be the source of much market angst but have retreated into background noise in an era dominated by the pandemic.

Bank of America noted that a surprising decline in spare capacity among the oil cartels members has helped fuel crudes recent gains, adding to tight supply conditions in the context of surging demand.

And its not just OPEC, either, with Iran emerging as an immediate concern amid grudging progress between Tehran and the West on a nuclear deal. Currently Middle East watchers see a low probability of a deal being reached, and talks could easily hit the skids.

Beyond the oil cartel, we see four additional elements that could lead to higher oil price volatility through March, Goldman Sachs analysts recently noted, and on Monday predicted crude would hit $105 per barrel.

Force multipliers include the U.S. possibly releasing more supply from its strategic petroleum reserve (a move the Biden administration has already deployed, to little avail), the migration from gas to oil as winter wraps up, and negative Iran headlines.

Its the latter that has the biggest potential to boost prices, with Goldman warning that an increase in bearish headlines on Iran deal progress would likely hit sentiment in a market desperate for spare capacity.

In other words, no rest for an inflation-weary public.

By Javier E. David, editor at Yahoo Finance. Follow him at @Teflongeek

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The inflationary risk markets are ignoring, but shouldnt - Yahoo Finance