Pre-market inventories: Oil prices fall as economies show signs of strain

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Oil prices may have reached parity – for now, at least.

Crude futures fall again, falling almost 3%. After approaching $140 a barrel in early March and rising above $120 just two weeks ago, Brent futures have fallen almost in a straight line and are now a hair’s breadth above $100. US oil hasn’t sniffed $100 a barrel in almost a week.

What happened? The global economy is catching up with high prices, and investors have butterflies.

Shanghai and other Chinese cities remain in lockdown as Covid cases rise. That means millions of people don’t drive or fly in the world’s second-largest oil-consuming country.

That doesn’t help: consumer prices in China rose 1.5% in March, driven by (what else) fuel and food prices.

“A rise in Covid cases…and a rise in oil prices amid the Russia-Ukraine conflict have clouded China’s overall growth outlook,” said Gargi Rao, economic research analyst at GlobalData.

Meanwhile, the risk of recession is rising in other major economies. Britain’s economy has stalled, growing just 0.1% in February as construction and manufacturing reversed, according to the Office for National Statistics. This was below economists’ expectations and a worrying result: the return to normal life after Omicron was expected to give the UK economy a boost. Today, the war in Ukraine and the spiraling cost of living crisis threaten to send him in the wrong direction.

Sluggish economic growth and rising inflation can be a toxic combination, damaging central banks’ ability to control prices. If they raise rates too high or too quickly, policymakers risk pushing the economy into a recession.

What else: such bad economic vibes are weighing on oil. But that’s not the only reason prices are falling.

Western countries have pledged to release an unprecedented 240 million barrels of emergency oil to the market in the coming months. The Biden administration is releasing one million barrels a day from the US Strategic Petroleum Reserve for the next six months. Other countries are contributing an additional 60 million barrels of their stockpiles under a drawdown coordinated by the Paris-based International Energy Agency.

The IEA said Russia could be forced to cut production by 3 million barrels a day from this month as it struggles to find buyers after invading Ukraine.

“The release of the government’s strategic oil reserves should ease some market tensions over the coming months, reducing the need for higher oil prices to trigger near-term demand destruction,” Staunovo said. , strategist at UBS, in a note to investors Monday morning. . “Some of the market tightness caused by self-sanctioning by Russian rough buyers – either for fear of future sanctions or for reputational reasons – should ease.”

Still, the market is well balanced and OPEC+ countries have so far refused to pump more oil. US oil companies, remembering the financial cost of collapsing prices at the start of the pandemic, have also been reluctant to reopen the taps.

UBS cut its short-term oil forecast by $10 a barrel, but still expects Brent to rebound to $115 a barrel by June.

In other words: high oil prices are here to stay. Unless the bottom falls out of the economy.

Do you remember the Arab Spring of 2011? Peoples of North Africa and the Middle East fought for freedom and social justice. But they also took to the streets because food prices were skyrocketing.

Inflation is back, as is social unrest. Over the past week, protests have erupted across the world, from Sri Lanka and Pakistan to Peru. Economists have long feared that soaring prices in countries at risk could lead to violence.

Pakistan’s parliament ousted Prime Minister Imran Khan from office on Sunday after double-digit inflation eroded what little support he had left. At least six people have died in recent anti-government protests in Peru sparked by rising fuel prices.

Food prices have risen sharply on the eve of the Arab Spring protests. The Food and Agriculture Organization of the United Nations’ food price index reached a record high of 131.9 in 2011. This index reached 159.3 in March, up nearly 13% from compared to February.

The war in Ukraine and the sanctions against Russia do not help. Ukraine is a major exporter of wheat, corn and vegetable oils, and prices for these products have jumped over the past month as the Russian invasion prevented much of this supply from leaving the country.

This particularly hurts countries that are already struggling with food insecurity and hunger. Forty percent of Ukraine’s wheat and maize exports go to the Middle East and Africa, according to Gilbert Houngbo, director of the International Fund for Agricultural Development.

You would think that at this point, Russia would be taboo for traders. But Russian bonds continue to trade furiously, reports my colleague Nicole Goodkind.

Russian bonds quickly turned dodgy after the country invaded Ukraine and became a global pariah. Still, speculators are increasingly intrigued by their bargain prices and high yields, according to Philip M. Nichols, an expert on Russia and social responsibility in business and a professor at the Wharton School at the University of Pennsylvania. .

“There are a lot of speculators buying these bonds that have been severely downgraded,” Nichols said.

Buying Russian sovereign debt remains legal, Nichols said, even if it is very risky. There is no guarantee that Russia will repay its bondholders, and the cost of insuring Russian bonds is astronomical.

Just now: S&P slapped Russia with a “selective default” rating on Friday.

Yet those risks haven’t stopped some Wall Street investors, nor has the fact that Russia has committed atrocities in Ukraine. And even if investors want to avoid risky bets on Russia, they should still sell to someone who does.

Who facilitates these exchanges? American financial institutions like JPMorgan Chase.

“It’s Wall Street,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. “It doesn’t surprise me that they saw some sort of loophole that they could exploit to make money.”

JPMorgan representatives say they act as middlemen, simply seeking to help customers.

The US Consumer Price Index, a closely watched inflation report, will be released on Tuesday morning.


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