The mini crash in crude oil in Asia was triggered by the rumour that China’s zero Covid policy means that Beijing will join Shanghai, the world’s largest port and the PRC’s financial capital, in a draconian lockdown that will gut demand for petroleum products in the world’s second largest oil importer.
Brent has fallen almost $40 from its post-Ukraine invasion high and it’s evident that the financial markets are now pricing in a global recession risk. After being obsessed for five months on 40-year highs in US consumer inflation amid supply chain shocks, labour shortages and port congestion. This is the reason why the yield on the 10-year T bond has fallen from 2.94% to 2.78% as I write even though we really have not seen peak inflation metrics yet, while the monetary hawkishness of Powell Fed has only intensified, with James Bullard of the St. Louis Fed even calling for a 0.75% rate hike at the May FOMC conclave.
Even Macron’s win in the French election was insufficient to negate the safe haven demand for King Dollar which has now soared to 1.07 Euro, 1.27 sterling and 128 yen.
The heartbeats of global finance now flash a recession SOS amid devastating losses in the asset prices. Geopolitics has become the defining feature of the global wet barrel or physical crude cargo trading markets. Epic US/EU sanctions against Russia to punish Vladimir Putin for his brutal invasion of Ukraine have led to a structural shortage of crude supply as Saudi Arabia and other Gulf producers who control most of OPEC’s spare capacity have not come forward to increase output, as they did in past supply shocks such as the Iranian revolution in 1979 or the Iraqi invasion of Kuwait in 1990.
Riyad wants to signal to Washington that the kingdom is miffed about the West’s tepid response to the repeated Houthi/Iranian missile and drone attacks on its oil and gas infrastructure. If Saudi Arabia announced even a 2MBD increase in output, Brent crude would fall $20 a barrel.
It is ironic that the developing world’s oil porters will pay the heaviest price for the Ukraine crisis as their economies are slammed by high crude prices, the rampage in king dollar and high interest rates that will inevitably trigger multiple sovereign debt crises. Even Egypt, a darling of the IMF and the Washington consensus was forced to devalue its currency by 15% because 86% of its grain imports come from Ukraine/Russia and agflation means mass hunger for its 35 million poor who struggle to survive on $2 a day.
My heart sinks when I think of the fate of the world’s poorest countries including Afghanistan where the Taliban has predictably caused a famine via their insane policies that the UN secretary general says nine million impoverished Afghans are selling their organs or their children in order to keep alive. What kind of a nightmare world have we inherited just because of war criminal in the Kremlin has chosen mass murder of civilians as an instrument of Neo Tsarist Russian imperialism?
Matein Khalid is Strategic Advisor, Asas Capital
Also published on Medium.
