What’s happening: The unusually sharp pullback is driven by hopes that Saudi Arabia and the United Arab Emirates could boost oil production, and China’s demand could collapse due to new coronavirus restrictions in major cities. This will reduce the pressure on the market.
Yet analysts warn we’re not out of the woods yet. Oil is still trading well above its cost of production, and in a moment of extreme uncertainty, extreme volatility is likely to continue.
“I wouldn’t rule out $200 a barrel right now,” Björner Tonhaugen, head of oil markets at Rystad Energy, told me. “It’s too early.”
After the invasion, oil prices skyrocketed as traders began to view Russian crude exports as untouchables. This raised concerns about how the supply of 4 to 5 million barrels per day could be replaced, especially as demand for the fuel ramps up in the summer.
Plus, China’s commitment to containing the spread of COVID-19, which has led to a lockdown in Shenzhen’s tech hub and new regulations in Shanghai, could mean the country needs less energy in the short term. China imports about 11 million barrels of oil per day.
“People remembered that we are still in an epidemic,” Tonhaugen said.
Why this matters: Falling oil prices have helped prevent gasoline prices from rising higher in the United States. They’ve stopped climbing for now, though a gallon of gasoline still costs an average of $4.32.
While $100 a barrel of oil is still extremely expensive, if prices stay in that range, it could allay some fears about an uptick in inflation. Policymakers will probably take a small sigh of relief.
But it is clear that investors remain troubled while processing the effects of Russia’s invasion. The price of Russian oil is still being offered to Brent at a steep discount of $26.
And analysts believe the direction of travel has been fixed. Giovanni Stanovo, an analyst at UBS, expects oil to trade at $125 a barrel by the end of June. For his part, Rystad Energy’s Tonhaugen thinks prices could still break records as the struggle plays out.
“It’s the calm before the storm,” he said.
Selling deepens in Chinese stocks
Investors are rushing to dump stock in Chinese companies as concerns mount about the consequences of regulatory action and a spike in Omicron cases. Whether Beijing could provide support to Russia, and be punished by the West for doing so, is fueling fears.
“There may be increased caution about the possibility of secondary sanctions on China,” Mitul Kotecha, strategist at TD Securities, told clients.
The Shanghai Composite fell nearly 5 per cent on Tuesday. Hong Kong’s Hang Seng fell nearly 6%. The index has fallen over 10% in the last two trading sessions.
“China’s economic recovery momentum has improved in January and February, laying a solid foundation for a good start to the first quarter of this year,” a spokesman for the National Bureau of Statistics said.
But as China battles its worst Covid-19 outbreak in two years, investors see little reason for optimism.
Julian Evans-Pritchard of Capital Economics wrote on Tuesday: “Officials ditching targeted containment measures in favor of a wholesale lockdown, this is likely to be even more disruptive than the delta wave last summer, which caused economic output. I had a sharp contraction.”
That’s not the only reason investors are nervous. Tech giant Tencent could face record fines for allegedly breaking Chinese anti-money launching rules, sending its stock into free-fall. Other big tech names like Alibaba have been battered after the Securities and Exchange Commission moved forward with cracking down on foreign companies that didn’t meet US disclosure requirements.
Could there be a Russian mistake tomorrow?
Latest: Half of the country’s foreign reserves – about $315 billion – are frozen by Western sanctions imposed after the invasion of Ukraine. As a result, according to Russia’s finance minister, Moscow will repay “creditors of those countries” in rubles until sanctions are lifted.
As my CNN business colleague Charles Riley reports, credit rating agencies will consider Russia in default if Moscow defaults on payments or repays a loan in dollars or euros with other currencies, such as the ruble or China’s yuan.
According to JPMorgan Chase, the moment could come as soon as Wednesday, when Moscow is required to pay more than $117 million in interest payments on dollar-denominated government bonds. Although Russia has issued bonds that can be repaid in multiple currencies since 2018, these payments must be made in US dollars.
Why this matters: A default could drive some of the remaining foreign investors out of Russia and further isolate the country’s crumbling economy.
Other possible outcomes are harder to assess. The 2008 global financial crisis, which resulted from the collapse of Lehman Brothers, showed how negative shocks can spread rapidly throughout the financial system and the global economy.
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Posted by the US Producer Price Index, a key measure of inflation, at 8:30 a.m. ET.
Coming tomorrow: The Federal Reserve is expected to raise interest rates in 2020 for the first time since the pandemic struck.