Uncomfortably Numb
A war is raging. Yet, stocks have risen from recent lows. Ukraine is far from an ideal situation, and the direction combat may take is a big unknown.
But there have been no significant new developments that might negatively affect investor sentiment, and investors seem to be taking the apparent stalemate in stride.
It’s not that we are immune to wanton acts of aggression by Russia. We’re not. But investors look at geopolitical affairs through a very narrow prism. That is, how will an event or events impact the economy?
There’s no short-term solution at hand. It’s as if we’ve grown comfortably uncomfortable, or numb. Investors seem to slowly be incorporating a ‘new normal’ into their collective outlook. You see, there hasn’t been a significant shock to demand for goods and services.
Having said that, let’s look at oil. We’ve seen wild gyrations since the war began.
The price jumped from about $90 per barrel, briefly rose to near $130, dropped to $95, and briefly notched $115 before settling at $113.90 on Friday (MarketWatch).
According to the International Energy Agency, Russia exports about 5 million barrels per day (mb/d) of oil and about 3 mb/d of refined products, or 8% of the world’s supply. It is the world’s largest exporter of crude oil and refined products.
An estimate from Energy Intelligence (EI) suggests that the dip in Russian petroleum exports to date has been somewhat smaller than the initial estimate of 3 mb/d, which coincided with a temporary oil price weakening after March 8.
EI suggests about 2 mb/d have gone “dark.” In other words, exports appear to be near normal, but much of the oil ends up in storage rather than landing at a refinery. Today, Russian oil is looking for buyers at discounts of up to $30 per barrel.
Price spike
A 2–3% drop in oil supply may not sound like much, but in today’s tight market, it is significant. It is why we’ve seen oil spike higher after the war began. The attempt to find some type of equilibrium price in today’s incredibly uncertain oil market is difficult; hence, the volatility.
Plus, the effect of the Russian invasion is not limited to energy. Russia and the Ukraine account for 29% of global wheat exports, according to EI, which is pressuring prices.
Last week, the Federal Reserve Bank of Dallas said that if the bulk of Russian energy exports slide off the market for the rest of 2022, a global economic downturn might be unavoidable. Currently, exports are down, but most exports continue to flow.
Final thoughts
Last week, first-time claims for unemployment insurance fell to the lowest level since 1969, per the U.S. Dept. of Labor, and S&P Global reported an acceleration in U.S. economic activity in March. Put another way, businesses and consumers have yet to adjust spending patterns amid the carnage in Ukraine.
Against the uncomfortable backdrop of the war, investors are taking comfort in the growing economy, but cautiously eye a Fed that is talking about aggressive near-term rate hikes.