What’s happening: The unusually sharp decline was driven by hopes that Saudi Arabia and the United Arab Emirates could boost oil supply, and that demand from China could fall due to new coronavirus restrictions in major cities. This would relieve pressure on the market.
However, analysts warn that we are not out of the woods yet. Oil is still trading well above its cost to produce, and high volatility is likely to continue in a moment of great uncertainty.
“I wouldn’t rule out $200 a barrel just yet,” Bjornar Tonhugen, head of oil markets at Rystad Energy, told me. “It’s very soon.”
After the invasion, oil prices skyrocketed as traders began to see Russia’s crude exports as untouchable. This raised concerns about how to replace that supply of 4-5 million barrels per day, especially with increased demand for the fuel during the summer.
In addition, China’s commitment to stem the spread of Covid-19, which has led to the closure of the technology center in Shenzhen and new bases in Shanghai, may mean that the country needs less energy in the short term. China imports about 11 million barrels of oil per day.
“People have remembered that we are still in a pandemic,” Tonhaugen said.
Why it matters: Low oil prices have helped prevent gasoline prices from rising in the United States. They’ve stopped climbing for now, even though a gallon of gasoline still costs about $4.32 on average.
While $100 a barrel of oil is still expensive, if prices stay in that range, it may ease some concerns about accelerating inflation. Policymakers are likely to breathe a sigh of relief.
But it is clear that investors remain unsettled as they grapple with the effects of the Russian invasion. The price of Russian oil is still at a massive $26 discount to Brent crude.
Analysts believe that the direction of travel has been set. Giovanni Stonovo, an analyst at UBS, expects oil to be trading at $125 a barrel by the end of June. For his part, Tonhaugen of Rystad Energy believes prices could break records as the struggle continues.
“This is the calm before the storm,” he said.
Heavy sell-off in Chinese stocks deepens
Investors have been racing to sink shares in Chinese companies as concerns grow about the consequences of crackdowns by regulators and a sudden rise in Omicron cases. Whether Beijing can provide support to Russia, and be punished by the West for doing so, heightens the fear.
“There may be increased caution about the possibility of secondary sanctions against China,” Mitul Kotica, strategist at TD Securities, told clients.
The Shanghai Composite Index is down nearly 5% on Tuesday. Hong Kong’s Hang Seng Index is down about 6%. The index has fallen more than 10% over the past two trading sessions.
“The momentum of China’s economic recovery improved in January and February, which laid a solid foundation for a good start in the first quarter of this year,” a spokesperson for the National Bureau of Statistics said.
But as China grapples with the worst outbreak of Covid-19 in two years, investors see no reason to be optimistic.
“With officials abandoning targeted containment measures in favor of wholesale shutdowns, this will likely be more disruptive than last summer’s delta wave, which led to a sharp contraction in economic output,” Julian Evans-Pritchard of Capital Economics wrote on Tuesday.
This is not the only reason investors are nervous. The tech giant, Tencent, reportedly could face a record fine for breaching Chinese anti-release rules, causing its shares to fall. Other big tech names like Alibaba have been hit after the Securities and Exchange Commission pressed ahead with a crackdown on foreign companies that do not meet US disclosure requirements.
Could a Russian default arrive tomorrow?
The latest: Half of the country’s foreign reserves – about $315 billion – have been frozen due to Western sanctions imposed after the invasion of Ukraine. As a result, Moscow will pay creditors from “unfriendly countries” in rubles until sanctions are lifted, according to Russia’s finance minister.
Credit rating agencies would likely consider Russia to be in default if Moscow defaults on its dollar or euro debt in other currencies such as the ruble or the Chinese yuan, my CNN Business colleague Charles Riley reports.
That moment could come as soon as Wednesday, when Moscow needs to turn over $117 million in interest payments on dollar-denominated government bonds, according to JPMorgan Chase. Although Russia has issued bonds that can be repaid in multiple currencies since 2018, these payments must be made in US dollars.
Why it matters: A default could drive the few remaining foreign investors out of Russia and further isolate the country’s crumbling economy.
Other potential consequences are difficult to gauge. The global financial crisis of 2008, triggered by the collapse of Lehman Brothers, showed how negative shocks can spread rapidly through the financial system and the global economy.
The US Producer Price Index, a key gauge of inflation, appears at 8:30 AM ET.
Coming up tomorrow: The Fed is expected to start raising interest rates for the first time since the pandemic arrived in 2020.
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