Emerging Markets Daily - March 7
Oil Soars to 13 Year High, Commodities 'Go Grazy', Rupee Hits Record Low on Oil Surge, Biden Mulls Saudi Visit, Shipping Stocks and the Ukraine Crisis
The Top 5 Stories Shaping Emerging Markets from Global Media - March 7
Oil Prices Hit 13 Year High As US Considers Banning Russian Crude
Oil Could Hit $180 Soon, MUFG Bank Says
The National
“Oil prices soared above $130 a barrel in early trading on Monday, their highest since 2008, after the US said it is considering banning the import of Russian crude and is discussing such a move with its European allies, in a bid to freeze the world's second largest energy exporter out of global markets and isolate Moscow economically for its military offensive in Ukraine.”
“Brent, the global benchmark for two thirds of the world's oil, hit $139.13 a barrel and West Texas Intermediate (WTI), the gauge that tracks US crude, jumped to $130.50 in early trading.”
“Brent hit a record high of $147.02 on July 11, 2008 amid the global financial crisis, while WTI soared to $146.90. ‘We are now in very active discussions with our European partners about banning the import of Russian oil to our countries, while of course, at the same time, maintaining a steady global supply of oil,’ US Secretary of State Antony Blinken said in an interview on NBC's Meet the Press show.”
“Oil prices could hit $180 a barrel and cause a global recession, according to Japan's largest lender MUFG Bank. ‘Should the prevailing Russia-Ukraine conflict intensify in the coming weeks and broaden to include energy sanctions, we would be increasingly convicted that the sheer velocity of Russian crude and refined products exports off the table would march the front end of the oil price curve to $180 a barrel by the summer if not earlier,’ said Ehsan Khoman, head of emerging markets research at MUFG.”
“Oil prices at such levels will lead to demand destruction and consumer energy spending plummeting, which happened in the early 1980s and mid-2000s, leading to global recessions in 1982 and 2009. ‘The prospect of history repeating itself is substantial,’ Mr Khoman said.” Massoud A Derhally reports.
Commodities Go Crazy - Historic and Volatile Week Ahead
Financial Times
“The news around Russia’s invasion of Ukraine is moving fast. To the extent that almost any article that one starts becomes horribly out of date by the time it’s finished. But one thing that can’t be denied is the volatility in commodity prices at the moment.”
“This Monday morning, Brent hit almost $140-a-barrel, gold $2,000 per ounce and European natural gas €345 per megawatt hour. Wheat, palladium and tin, to name but a few, are also going parabolic.”
“The movements come after Antony Blinken, the US secretary of state, said over the weekend that Washington was considering a ban on Russian oil imports.”
“To get a sense of how volatile commodity markets are right now, take a look at the chart below from Deutsche Bank’s Jim Reid, based on Thomson Reuters’ core commodity index.”
“The moves we’ve seen this morning make this, as far as commodity markets go, the biggest week on record”, Reid says. If things remain as rocky as they have been this morning, then it will, as Reid points out, be difficult to ignore comparisons with the energy price shocks of the 1970s.” The FT reports.
Rupee Falls to Record Low As India Markets Sell Off on Oil Surge
Bloomberg
“The Indian rupee tumbled to a record low, while stocks and bonds also slumped as a relentless surge in oil prices darkened the nation’s economic outlook.”
“India relies on overseas purchases to meet about three-fourths of its oil requirement, making it one of the most vulnerable in Asia to higher Crude prices. Oil prices, already up more than 60% this year, may worsen price pressures, hurt the nation’s finances and upend a nascent economic recovery. “
“‘For decades now, crude has remained the number one risk for India given its high dependence on the imported fuel,’ said Srinivas Rao Ravuri, chief investment officer at PGIM India Asset Management Pvt. ‘The escalating geopolitical tensions, crude and the imminent Fed hike have impacted investor sentiment toward emerging markets, especially India, which until recently was trading at premium valuations to its peers.’”
“The rupee declined as much as 1.1% to 76.9812 per dollar on Monday. Benchmark government bond yields rose seven basis points to 6.89%, while the S&P BSE SENSEX Index fell 2.7% to 52,842.75 points, the lowest closing since July.”
“Today’s move has turned the rupee into Asia’s worst performer this year. State-run banks sold dollars probably on behalf of the central bank to curb rupee’s losses, according to Mumbai-based traders, who didn’t want to be named.”
“‘Geopolitical risks will likely stay elevated, especially on the terms of trade shock and current-account deficit implications,’ Barclays Plc. analysts including Ashish Agrawal wrote in a note. ‘The INR is more sensitive to supply side oil shocks,’ he said, adding that the Reserve Bank of India ‘is likely to continue selling USD passively, but is unlikely to defend any particular level.’” Bloomberg reports.
Biden Team Mulls Saudi Arabia Trip to Repair Ties, Urge More Oil Production
Axios
“President Biden’s advisers are discussing a possible visit to Saudi Arabia this spring to help repair relations and convince the Kingdom to pump more oil, Axios has learned.”
“A hat-in-hand trip would illustrate the gravity of the global energy crisis driven by Russia's invasion of Ukraine…Biden officials are in Venezuela this weekend to meet with the government of President Nicolás Maduro. Some Republicans and Democrats in Washington suggest Venezuela's oil could replace Russia's, according to the New York Times.”
“Any visit to the Persian Gulf would come amid a busy presidential travel schedule during the next few months. Biden will likely take trips to Japan, Spain, Germany and, potentially, Israel, Axios has also learned.”
“….Sanctions against Russia's oil exports — including a possible ban on importing Russian oil into the U.S. — would both elevate worldwide gas prices and stoke domestic inflation….Biden officials want to preserve options for the president, including the chance to make amends with the Saudis and persuade them to increase their oil production.” Hans Nichols reports.
As War Drags on, Shipping Stocks Might Sink, Not Swim
Wall Street Journal
“For global shipping companies that spent the past year feasting on insatiable demand for their services, the party must end sooner or later. The Russia-Ukraine war is putting pressure on the shipping lines with delivery disruptions and rerouting of cargo. But the big story remains the normalization of U.S. demand as stimulus fades and the waning Omicron wave pushes global consumption back toward services, which appears to already be weighing on some shipping rates.”
“And if the war grinds on and starts hurting growth globally, rates may start trending downward much faster. Shipping shares like Cosco Shipping, A.P. Moeller-Maersk, Evergreen Marine and Hapag-Lloyd AG could face increasing headwinds by late 2022 or early 2023.”
“To be sure, the conflict in Ukraine is having an immediate impact too, especially for commodities. The Baltic Dry Index, which measures the cost to move major bulk commodities by sea, has risen about 50% since late January—although that still leaves it well below the lofty heights of late 2021.”
“But in terms of the container shipping trade—which witnessed a record profit boom over the past year and which is dominated by much larger, more profitable companies like A.P. Moeller-Maersk and Evergreen Marine—Ukraine and Russia are minnows. Russia accounted for a mere 0.64% of global container trade in 2020 while Ukraine accounted for 0.14%, according to United Nations data.”
“The World Container Index compiled by London-based Drewry Shipping Consultants has ticked down since conflict started, with the largest drop in the Shanghai-Rotterdam route, where rates fell 5% in the week ending March 3.” Megha Mandavia reports.
”It’s not what you look at that matters. It’s what you see.” Henry David Thoreau