Oil price spike crushes Asian markets

Oil surges on talk of banning Russian crude

Oil prices are 8.50% higher this morning in panicked early buying in futures markets after weekend reports that the US was looking at completely banning Russian oil imports, and the Russians themselves inserted some hefty last-minute demands on the US in the small print of the almost-finished Iran nuclear deal. With the latter in jeopardy, and the former sure to lead to higher domestic prices, it is no surprise that Asian traders, a region heavily reliant on imported energy, pushed the panic button.

My charts are suggesting the Brent crude traded briefly at USD 138.00 a barrel this morning, but I’ll take that with a grain of opening-panic, salt. They definitely traded above USD 130.00 a barrel though and are currently lying around USD 128.00 a barrel. To be clear, Iranian oil can’t replace Russian oil, and certainly not at the touch of a button. Nor with OPEC+ compliance above 100% is there much capacity within the grouping to immediately pump more. Those that can, namely Saudi Arabia and the UAE, are well and truly in the box seat though and I expect the phones to be ringing in Riyadh and Abu Dubai today, with President Biden wanting “a chat.”

Today’s price action will probably be another temporary death-knell for the “energy transition” in the short to medium term, although in the long-term, it will speed it up. The uncomfortable truth is resilience in supply chains has taken the front seat over saving the planet, and I am expecting nuclear, coal, shale and gas to get a new lease of life as the price of bringing Russia to heel and isolating them. Europe, I believe, is rapidly learning this lesson, but countries such as New Zealand (it banned exploration and instead imports Indonesia coal and offshore gas), and even the US will have to face this uncomfortable reality. We are going to hear a lot more of the term “supply-chain resilience” over the next few years. Russia-Ukraine has delivered that lesson in spades before China ever had to play the rare earth elements card. I believe peak-NIMBYism is upon us, I won’t miss it.

Of course, it is not just oil prices that are flying into space. Food, industrial metals, and other energy prices are at escape velocity as well. The price action in Asia is telling this morning in early trading. While the US dollar is rising on haven sentiment and the fact that most oil is priced in greenbacks, both the Australian and New Zealand dollars have also risen, while the Malaysian ringgit is unchanged, even as most Asian currencies are lower. You can add in Indonesia later today. The premise is quite simple, if you pump, dig, or grow stuff out of the ground that the rest of the world needs right now, you are in the driver’s seat. You might also want to add previous basket cases, Brazil, Argentina, and South Africa to that list as well. Canada and the United States and the Middle East, are well-placed, and I can actually see China making good on its US-China trade deal targets in the months ahead.

I remain highly concerned about the stagflationary wave sweeping the world though. Spare a thought for the poor countries of the world who will suffer the most. The saying goes that the best cure for high prices is high prices. Unfortunately, in a stagflationary environment, that doesn’t hold true. I suspect growth projections for 2022 around the world will need to be sharply revised lower, and it will be interesting to see what the central banks of the world will do. I believe Europe and Asia will halt thoughts of monetary policy normalisation, and with Europe on the front lines, I can’t blame them.

Things will be different in what I will politically incorrectly describe as the Anglo-Saxon world. Friday’s US Non-Farm Payrolls was another monster, printing at 678,000 jobs, with 90k+ revisions upwards for December and January. The US is now just 2 million jobs short of early 2020, and you can probably account for that with early-retiring boomers. With CPI now over 8.0%, worker shortages and wage pressures, the Fed shall hike and keep hiking. Ditto Canada, and New Zealand, where the RBNZ has made a dog’s breakfast of the economy, and I expect the RBA in Australia to blink as well.

Interestingly, China’s Two Sessions’ meeting over the weekend set the lowest GDP target since 1991, at 5.50%. It has signalled it will roll out the infrastructure spending playbook to soften the blow of lower growth, but looking at oil prices this morning, I would say 5.50% is ambitious. We have an election in South Korea this week, another country where wealth has been transferred to the rich from poor and newly non-homeowners. It will be interesting to see if voter anger results in a lot of politicians losing their jobs. It will be a strong signal to a number of countries around the world this year with elections, as to whether incumbents should start packing up their personal effects.

If there are any macro-investors left that haven’t been replaced by robots, 2022 will probably be the best conditions for macro in two decades. Once the world adjusts to the new normal of Russia, are we going to see yield curves moving higher? Certainly, in the US this is possible. My guess is we will see inverted curves becoming much more common. The buy-everything rally in equities is well and truly over. The zombie army of mouse-clicking day traders will need to use more brains and less mouse-clicking going forward. Even Reddit won’t save them.

Still, there is always cryptos, they are a store of wealth in tumultuous times apparently. As for me, when I married Mrs Halley, my mother-in-law gave me a gold bar (its an Asian thing dear readers). Mrs Halley immediately took it for “safe-keeping,” but I’m going to ask Mum is she has some more hidden around the house.

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