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ALEX BRUMMER: Oil is causing trouble on the equity markets

ALEX BRUMMER: Uncertainty around Ukraine, interest rates and overheating pandemic valuations cloud equity markets

Nobody really knows how the impasse over Russia’s military buildup in Ukraine will be resolved.

There was a thunderous verbal response from NATO boss Jens Stoltenberg and a confused and less convincing intervention from Joe Biden. Diplomatic doors are kept open.

Britain upped the ante by sending anti-tank weapons to Kiev. Conflict is invariably good for BAE and the rest of the UK’s advanced defense and aerospace industry. For a global economy struggling with supply chain issues, the strategic impasse could hardly be in the worst place or at the worst time.

Uncertainty: there were sharp declines ahead of the weekend on European stock markets, with the FTSE 100 less vulnerable than the others due to its high energy component

Long after the Yom Kippur War in 1973, and later after the first Iraq War in 1990, the main concern of advanced countries was blockages in the Gulf of Hormuz or a Gulf States oil embargo. As Europe has become less dependent on the Middle East for its energy needs, the flashpoint for security of supply has shifted across the Urals to Russia and its control of pipelines.

Under Angela Merkel’s leadership, Germany allowed itself to become far too dependent on Moscow. When Japan’s Fukushima nuclear power plant exploded in 2011, Merkel suspended nuclear production and investment, making the country more dependent on imported gas.

A more recent decision to burn less coal in order to meet carbon emissions targets has increased this Russian dependence.

The new Nord Stream gas pipeline, designed to ease capacity constraints on existing connectors, risks getting caught up in the Ukraine crisis with sweeping Western sanctions against President Putin’s Russia looming.

All of this is creating huge uncertainty about the future of energy prices and rapidly changing the outlook for inflation.

As recently as October 2021, the Office for Budget Responsibility forecast consumer price inflation to be 2.3% in 2021 and 4% this year. The latest data shows that annual consumer price inflation reached 5.4% in December and could reach 7% in the spring.

Forecasting wholesale oil and gas prices can be very tricky. Regardless of what happens in Ukraine, the outlook is not encouraging. Brent futures are up 50% in 2021 and have already climbed 14% since the start of 2022, hitting a seven-year high at $89 a barrel.

At a time when inventories are low and geopolitics are affecting production in several parts of the world, investment bankers Goldman Sachs, among others, forecast an oil price of $100 a barrel by the middle of the month. year. Natural gas prices are following oil in what is likely to be a deep inflationary shock.

There are signs that the supply bottlenecks, which have been a major contributor to the surge in inflation, are easing.

The RSM UK supply chain index showed some improvement in December, but it is uncertain whether the post-pandemic era adjustment is complete.

The emergence of the Omicron variant in China, where the coronavirus began two years ago, is leading to further factory and port closures. This in turn could put upward pressure on prices. Finally, central banks are waking up to the idea that the current surge in inflation is anything but temporary.

The Bank of England led the way among advanced central banks when it raised the Bank Rate from 0.1% to 0.25% in December.

With market analysts now expecting inflation to peak at 7% in the spring, a further 0.25 percentage point rise is expected in February and rate forecasts hitting 1.5% by now. the end of the year.

The Old Lady is no longer alone. Norway has already hiked rates and the Federal Reserve this week hinted at policy tightening. The European Central Bank finally seems to be listening to its German adviser Isabel Schnabel who has been warning for several weeks that the rise in energy prices could be persistent and that a response may be necessary.

Uncertainty around Ukraine, interest rates and overheating pandemic valuations cloud equity markets.

In the United States, the Nasdaq has fallen by 10% since the beginning of the year and the former New York stars Netflix, and more severely Peloton, are sanctioned. There were big falls ahead of the weekend in European stocks, with the FTSE 100 less vulnerable than the others due to its high energy component. It has less setback due to its chronic underperformance since Brexit.

We live in turbulent times, but no need to wrap up just yet.