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Tuesday, February 8, 2022

Geopolitics are pushing oil toward $100, and that’s a problem for inflation

Ukraine and OPEC have become inflation risks — of sorts.

And Wall Street, preoccupied as it has become with a host of other issues like interest rates, earnings and economic growth, has yet to fully appreciate why they matter.

Investors haven’t been paying much attention to the crisis in Eastern Europe, which is just one of several geopolitical flash points menacing a world that’s still in the clutches of COVID-19. However, oil is emerging as a barometer of concerns like a potential Russian invasion of Ukraine, and an oil cartel that’s burned through spare capacity.

As if we needed any more sources of price pressure, crude is inching closer and closer to $100 per barrel — and analysts are warning the balance of risks will make it “very easy” to breach that psychological barrier, Yahoo Finance’s Ines Ferre reported on Monday.

Regarding Ukraine, the biggest fear is that an incursion by Russia will force the hand of the United States, raising the specter that a cold war with Moscow could easily turn hot.

"The U.S. wants to make it clear that Washington and its allies are absolutely prepared if it comes to a major military escalation,” Eurasia Group senior analyst Zachary Witlin told Yahoo Finance Live in a recent interview.

At least for now, that remains a low probability. However, the potential for other spillover effects — like an energy supply crunch that dents Europe’s recovery, to an armed conflict that disrupts the operations of multinational companies — remains a very real and present danger. With energy prices already elevated, the Russia scenario could easily add to upward pressure that would translate into higher prices, and at the worst possible time.

Last week, Mondelez International’s CFO told Yahoo Finance’s Brooke DiPalma that the company was concerned about its employees in the region. Russia may account for an estimated 10% to 11% of Mondelez's European Union (EU) segment, and approximately 3% of its total sales in 2022, Piper Sandler recently estimated.

"As long as the Russians are threatening to move into Ukraine, [the crude oil] market's going to stay bid," Bob Yawger, Mizuho Americas executive director, told Yahoo Finance Live recently. If Russia’s oil is "sanctioned or there's trouble moving barrels... that's going to be a major problem"