$125 Oil Could Push The U.S. Into A Recession

in news •  3 years ago 

Russian forces launched their long-feared attack on Ukraine, and the crisis keeps getting worse at every turn. According to Russia, its first day of the Ukraine invasion had achieved all its goals, with Russian forces managing to destroy 83 land-based Ukrainian targets. On the other hand, official sources have reported 203 attacks by Russia on its western neighbor on the first day. Ukraine appears overwhelmed, with the country's defense minister urging citizens to fight back with Molotov cocktails.

On Thursday, the United States, Canada, and the UK slapped fresh sanctions on Russia, including excluding Russia's largest financial institutions from global financial systems; Imposing an asset freeze against all major Russian banks, canceling all export permits with Russia and prohibiting all major Russian companies from raising financing within 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. Brent futures (CO1:COM) (NYSEARCA:BNO) have jumped +8% to trade above $105 per barrel, while WTI futures (CL1:COM) (NYSEARCA:USO) have rallied by a similar margin to trade just a shade below $100 per barrel. The markets have been bracing for this kind of outcome given that Russia is the world's No. 3 exporter of oil and No. 2 exporter of natural gas. Russia produces 10% of the world's oil and 40% of European natural gas. Thus far, the U.S. and its European allies have made it clear they have no intention of impeding flows of energy out of Russia via sanctions. On its part, Russia thus far has not made any direct indications they will restrict energy exports, though the rhetoric is heating up and gas flows from Russia to Europe remain ~50% below the 5yr average. Experts are warning that Russia remains in a prime position to continue weaponizing its oil and gas assets, 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 tack.

According to Richmond Federal Reserve President Tom Barking, U.S. consumer spending will likely be curtailed and pose a risk to U.S. economic growth if the Ukraine conflict leads to sustained high energy prices.

"If oil prices do continue to go up … It absolutely is going to increase recorded inflation. But it also constrains spending," Barkin has said at an economic symposium.

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