$125 Oil causes the next U.S Recession

Russian forces launched their dreaded attack on Ukraine and the crisis is getting worse day by day. According to Russia, the first day of the Ukrain invasion had accomplished all its objectives with Russian forces successfully able to destroy 83 land-based Ukrainian targets. On the other hand, official sources stated that 203 attacks by Russia on its western neighbour on the very first day of the war. Ukraine seems overwhelmed and overjoyed with the country’s defence minister urging citizens to fight back with Molotov cocktails.

[Source – https://markets.businessinsider.com/]

On Thursday, the United States, Canada, and the United Kingdom imposed fresh sanctions on Russia, including the largest financial institutions of Russia from global financial systems, imposing an assets freeze against all major Russian banks cancelling all Russian export permits and prohibiting all major Russian companies from raising funds within all their territories among other measures predictably crude oil and gas prices are surging as Russia strikes major cities in Ukraine hitting levels not seen since 2014.

[Source – https://oltnews.com/ ]

Brent Futures (CO1:COM) (NYSEARCA: BNO) have jumped +8% to trade above $105 per barrel while WYI features (CL1:COM) and (NYSEARCA: USO)have railed by an indistinguishable margin to trade just a shade below $100 per barrel.

[Source – https://jnews.uk/]

The markets have been bracing for this kind of outcome given that Russia is the world’s 3rd biggest oil exporter and 2nd largest natural gas exporter. Russia produces overall 10% oil and 40% of European natural gas. Thus far the United States and its European allies have made a clear statement that they have no intentions to hold up flows of energy out of Russia through sanctions. For its part, Russia has made no direct indication to stop or restrict energy exports, although the rhetoric is heating up and gas flows from Russia to Europe remain around 50% below the 5-year average. Experts are warning that Russia can use their oil and gas assets as a weapon which could lead to severe price spikes.

Indeed, the crisis could very well change the trajectory of the U.S economy and force the Fed to change course.

According to Richmond Federal Reserve Chairman Tom Barking, U.S. consumer spending will likely be curtailed and create a risk to US economic growth if the conflict in Ukraine keeps going and leads to sustained high energy prices.

At an Economic Symposium Barkin stated “If oil prices do continue to go up … It absolutely is going to increase recorded inflation. But it also constrains spending,

[Source – https://libaasbynandini.com/]

Worse to Worse

The latest economic data shows that the US inflation hit a four-decade high of 7.5%, prompting the Federal Reserve Bank of St. Louis President James Bullard to argue for a surprise rate hike. In a research note, Goldman Sachs’ Jan Hatzius has warned that the fast rapid progress in the U.S labour market and hawkish signals within minutes from the Federal Open Market Committee suggest faster normalization with the central bank now likely to increase rates, interest four times in this year and begin its balance sheet runoff process in July, if not sooner.

The Ukraine crisis could also lay to waste forecasts by Fed Chair Jerome Powell and other policymakers that inflation could begin to subside naturally as federal stimulus and congressional aid to the economy fade and supply chain bottlenecks will be reduced.

Currently, higher energy costs present the biggest risk of further boosting U.S inflation from its four-decade high, which is bad for the U.S economy as consumer confidence drops. A survey done by the University of Michigan showed that consumer confidence fell by 8.2% from January to February with fewer consumers planning to purchase homes, cars or go on vacation in the next six months due to short term economic outlook.

Indeed, there are fears that the US economy could even slip into a recession.

[Source – https://oilprice.com/ ]

Diane Swonk, the chief economist at Grant Thornton, evaluates that the US economy can weather six months of oil prices on an average of around $100, and it could worsen the inflation problem, but sustained period of $125 a barrel oil would grow and can lead to increasing unemployment.

A few days ago American president Joe Biden warned the American citizens that a Russian invasion of Ukraine and America would come at a high cost.

My administration is using every tool at our disposal to protect American businesses and consumers from rising prices at the pump. Defending freedom will have costs for us as well, here at home. We need to be honest about that,” the President has said. Biden has revealed that the U.S. is “executing a plan in coordination with major oil-producing consumers and producers toward a collective investment to secure stability and global energy supplies,” adding, “this will blunt gas prices.”

At this point, it is not clear what plan the president was trying to deliver but it likely involves the sale of Strategic Petroleum Reserves (SPR) by several countries including the 600 million barrels. That might be effective for the short term but will fall flat if Russia will engage in a long battle with other oil producers – especially now its $630 billion war c0hest to its name.

[Source – https://oltnews.com/ ]

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