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Oil Price Surge: Signaling Volatile Motions

The price of US oil surged to a record high in more than a decade on Wednesday (3/2), following Russia's invasion of Ukraine. Supposing that the oil market was already constrained prior to the calamity, the crisis aggravated after OPEC and its oil-producing allies, including Russia, chose to maintain output levels whilst demand rebounds. The US oil benchmark West Texas Intermediate (WTI) crude was settled at US$110.6 per barrel, with a day range of US$106.4 to US$116.5, the highest since May 2011. Furthermore, the global oil benchmark, Brent, soared to US$113.9 per barrel and has been trading around US$111 for the majority. This rate has reached its highest since June 2014. Following that, the financial sanctions imposed on Russia have had knock-on implications. This influences foreign buyers to become reluctant to purchase energy supplies from Russia. "Adding to the banking sanctions that have been imposed on Russia, we've estimated about 70% of Russian crude oil exports can't be touched," claimed Amrita Sen, director of research at Energy Aspects. To offset the energy market disruptions, OPEC and its allies agreed to raise overall monthly output by 400,000 barrels per day in April 2022. Moreover, the International Energy Agency plans to release 60 million barrels of oil reserves, while the US release 30 million barrels. Tensions have grown due to Russia's invasion of Ukraine, and the west's more extensive sanctions might hamper supplies from both countries.

Other commodities, including natural gas and coal, have been hit as well. According to Refinitiv, the coal price on the ICE Newcastle (Australia) market finished up 46% to US$446 per ton on Wednesday (3/2). This is the highest level on record, dating back to at least in the year 2008. European coal prices for 2023 have also increased to a record high of US$260.5 per ton amid fears of supply shortages in Europe. Natural gas prices have correspondingly risen exponentially, with the Dutch April gas contract reaching a historic high of €185 per megawatt-hour. British wholesale gas is 35% higher at £390.7 per therm after touching £398 per therm. As is well recognized, Europe is highly dependent on Russia for coal and natural gas supplies, which is why European countries have attempted to diversify their energy demands. To lessen reliance on Russian natural gas, the German government intends to extend the life of coal-fired power facilities, which they previously planned to phase out by 2030. "Recent events have demonstrated to us all that energy policy is about more than the economy and the environment. However, security is also indeed an issue. We must extricate ourselves off our reliance on energy imports from a single country, "said Olaf Scholz, Chancellor of Germany, as quoted by Reuters.

While this geopolitical issue has prompted oil prices to skyrocket and impacted other commodities like natural gas and coal, stocks have seen volatile behaviour. Despite a rise in oil prices, stocks rebounded significantly on Wednesday (3/2). The Dow Jones Industrial Average achieved 596 points, or 1.79% and closed at 33,891. The S&P 500 gained 80 points or 1.98% to 4,386.54. It was a broad surge, with nearly every stock in the Dow's 30-stock index rising. The move was also reinforced by a statement from Federal Reserve Chair Jerome Powell, who indicated that the Fed would take a rational stance to help appease volatile markets momentarily. Powell left the possibility that the Fed would raise interest rates and tighten more aggressively later this year. Markets are undergoing strong reversals in certain sectors throughout this period. However, Wall Street argues that the market is close to or has already found its bottom for the year. In a note to CNBC International, Citi strategist Robert Buckland said, "Despite the difficult events in Ukraine, global equities have been fairly robust. Losses have been concentrated in stocks with direct Russia exposure and Financials. We still want to buy the dips, and highlight, that global equities have ended 10-20% higher after previous geopolitical crises." Given the circumstances, geopolitical tensions have undoubtedly disrupted the global supply chain and induced market volatility. In essence, investors need to monitor the market closely throughout this period and attempt to capitalize on these signaling motions as the market remains volatile.

Sources :

CNBC International

The Guardian

Yahoo Finance

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