Pre-market shares: Oil prices are falling as economies show signs of pressure

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Oil prices may have met their match – for now, at least.

Raw futures tumble again, sinking almost 3%. After approaching $ 140 per. barrel in early March and peaked at $ 120 as recently as two weeks ago, Brent futures have fallen in almost a straight line and are now just a hair above $ 100. US oil has not sniffed $ 100 per barrel. barrel for almost a week.

What happened? The global economy is catching up and investors are getting a case on the butterflies.

Shanghai and other Chinese cities remain closed as Covid cases rise. This means that millions of people do not drive or fly in the world’s second largest oil consuming country.

Does not help anything: China’s consumer prices rose 1.5% in March, led higher by (what else) fuel and food prices.

“An increase in Covid cases … and increases in oil prices in the midst of the conflict between Russia and Ukraine dampened the overall growth prospects for China,” said Gargi Rao, economic research analyst at GlobalData.

Meanwhile, the risk of recession is rising in other major economies. The UK economy is in neutral, growing just 0.1% in February, as construction and manufacturing went in reverse order, according to the Office for National Statistics. It was below economists’ expectations and a worrying result: After Omicron’s return to normal life was expected to give the UK economy a boost. Now war in Ukraine and a rising cost of living crisis are threatening to send it in the wrong direction.

Stagnant economic growth and rising inflation can be a toxic combination that harms central banks’ ability to bring prices under control. If they raise interest rates too high or too fast, policy makers risk throwing the economy into a recession.

What else: Such bad economic vibes weigh on the oil. But that’s not the only reason prices are falling.

Western countries have pledged to release an unprecedented 240 million barrels of emergency oil on the market in the coming months. The Biden administration will release one million barrels a day from the US Strategic Petroleum Reserve over the next six months. Other countries are contributing an additional 60 million barrels from their stocks as part of a draw coordinated by the Paris-based International Energy Agency.

The IEA said Russia could be forced to cut its production by 3 million barrels a day, starting this month, as it struggles to find buyers after invading Ukraine.

“The release of strategic government oil reserves should ease some market tightness in the coming months, reducing the need for oil prices to rise to trigger short-term destruction of demand,” said Giovanni Staunovo, strategist at UBS, in a note to investors Monday morning. . “Some of the tightness in the market caused by self-sanctioning of Russian crude oil buyers – either for fear of future sanctions or for reputational reasons – should ease.”

Yet the market is finely balanced, and OPEC + nations have so far refused to pump more oil. U.S. oil companies, remembering the economic toll as prices collapsed in the early days of the pandemic, have also been reluctant to reopen the spouts.

UBS lowered its short-term oil forecast by $ 10 per barrel. barrel, but it still predicts that Brent will return to $ 115 per barrel. barrel in June.

In other words: high oil prices are here to stay. Unless the bottom falls out of the economy.

Do you remember the Arab Spring in 2011? People throughout North Africa and the Middle East fought for freedom and social justice. But they also took to the streets because food prices rose.

Inflation is back, and so is social unrest. Over the past week, protests have erupted around the world, from Sri Lanka and Pakistan to Peru. Economists have long been concerned that rising prices in vulnerable countries could lead to violence.

The Pakistani parliament ousted Prime Minister Imran Khan from office on Sunday after double-digit inflation eroded the small amount of support he had left. At least six people have died in recent protests against the Peruvian government triggered by rising fuel prices.

Food prices rose sharply ahead of protests in the Arab Spring. The Food Price Index of the Food and Agriculture Organization of the United Nations hit the then record of 131.9 in 2011. That index hit 159.3 in March, an increase of almost 13% from February.

The war in Ukraine and sanctions against Russia do not help. Ukraine is a major exporter of wheat, corn and vegetable oils, and the prices of these goods have risen over the last month, as Russia’s invasion has prevented much of this supply from leaving the country.

It is particularly damaging to those countries that are already struggling with food insecurity and hunger problems. Forty percent of wheat and corn exports from Ukraine go to the Middle East and Africa, according to Gilbert Houngbo, head of the International Fund for Agricultural Development.

One would think at this point that Russia would be taboo for traders. But Russian bonds continue to trade furiously, reports my colleague Nicole Goodkind.

Russian bonds have quickly become junk-rated after the country invaded Ukraine and became a global pariah. Yet speculators have been fascinated by their basement prices and high yields, according to Philip M. Nichols, an expert on Russia and social responsibility in business and a professor at the University of Pennsylvania’s Wharton School.

“There are a lot of speculators buying up on these bonds that have been severely downgraded,” Nichols said.

Buying Russian government debt remains legal, Nichols said, if it is very risky. There is no guarantee that Russia will pay back its bondholders, and the cost of insuring Russian bonds is astronomically high.

Right inside: S&P beat Russia by a “selective standard” rating on Friday.

Yet these risks have not stopped some Wall Street investors – nor has the fact that Russia has committed atrocities in Ukraine. And even if investors want out of risky bets on Russia, they still have to sell to someone who does.

Who facilitates these trades? US financial institutions like JPMorgan Chase.

“This is Wall Street,” said Kathy Jones, chief interest rate strategist at the Schwab Center for Financial Research. “It does not surprise me that they saw a kind of loophole they could exploit to make money.”

JPMorgan representatives say they act as intermediaries, simply seeking to help customers.

The US Consumer Price Index, a closely monitored inflation report, will be released Tuesday morning.

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