Daily roundup of research and analysis from what The Globe and Mail’s market strategist Scott Barlow
BofA Securities global economist Ethan Harris says “there is no clear off-ramp for Russia,” setting the stage for months of investor uncertainty,
“If we believe the experts, Putin would have never invaded, Ukraine would have offered weak resistance and sanctions would be limited. Looking ahead,this lack of guidance makes it hard to put probabilities on outcome … However, retaining the old benign baseline and saying “risks are heavily skewed to the downside” is not very useful … In our view, this is clearly not a temporary risk-off event that the economy and markets shrug off and return to business as usual… Our commodity strategists estimate that less than half of Russian exports could be replaced by US shale, Iran and OPEC+. However, prices could stabilize at elevated levels if Russian exports get redirected to China … The key to the global outlook is not what happens to the Russian economy, but how sanctions and the Russian reaction to sanctions impact commodity markets … Much of the increase in energy prices so far is due to risk premiums, but prices could go much higher if full against sanctions Russian energy exports are put in place … Baseline [market case] : An ugly stalemate. With Russia refusing to leave Ukraine, current sanctions stick and more are added, including some restriction on oil exports. The sanctions stay in place indefinitely, although Russia finds ways to circumvent some of the restrictions. For example, they could reroute some of its oil exports to China. Quarterly average Brent prices peak at $130//bbl in 2Q, and average $110/bbl for the year. They then drift back below $100 in 2023. Uncertainty weighs on confidence particularly over the first half of the year.”
“Harris: “There is no clear off-ramp for Russia, hence our base case assumes many months of high uncertainty” - (research excerpt) Twitter
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Reuters energy columnist John Kemp described the current energy situation as “biggest shock since 1970s,”
“Petroleum inventories were depleting at an unsustainable rate even before Russia’s invasion of Ukraine and the disruption of Russia’s petroleum exports in response … Inventories are now 99 million barrels (8%) below the pre-pandemic five-year seasonal average for 2015-2019 and at the lowest seasonally for seven years .. Gasoline stocks are close to normal but stocks of crude are 51 million barrels (11%) and distillate stocks are 30 million barrels (21%) below the pre-pandemic five-year seasonal average…The combination of sluggish growth in production, rapid growth in consumption and now sanctions has created the classic conditions for a spike in prices … The most remarkable thing is not how high prices are at the moment but that they have not already spiked much higher. In real terms, Brent prices are the highest since September 2014, but they are still only in the 85th percentile for all months since 1990.”
“Oil market caught in biggest shock since 1970s: Kemp” – Reuters
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BMO chief economist notes that oil prices hit a record high in Canadian dollar terms this week, “a nightmare for consumers”
“Oil prices have pulled back meaningfully from the spike early this week, but that only dulls the shock. Converted to Canadian dollar terms, WTI was still trading at a hefty C$135 by late Thursday. This metric hit a record high on Tuesday, punching up to C$159 per barrel, rising above the prior peak of $148 in July 2008. A year ago, oil was closer to C$80. The record high in Canadian dollar terms, at a time when prices are still well shy of records in US$ terms, reflects the near complete delinking between oil and the loonie this year. (When oil surged in 2008, the currency was trading around parity.) In fact, the currency has been negatively correlated with oil prices so far in 2022, in a full reversal from the past twenty years. This delinking is a windfall for domestic producers, but a nightmare for consumers.”
“Oil in CAD sets new record (BMO):” – (research excerpt) Twitter
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Column: “A plunge in emerging market stocks suggests the TSX is in trouble. But this time is different” – Barlow, Inside the Market
Diversion: “Does your boss really care what you think?” – BBC
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Scott Barlow