Oil rates falls as economies show signs of strain

Oil rates may have met their match — for now, at least.

Crude futures are tumbling yet again, sinking around 3%. After nearing $140 a barrel at the beginning of March and topping $120 as for last two weeks ago, Brent futures have loosened in nearly a straight line and now sit just a hair above $100. US oil hasn’t sniffed $100 a barrel for nearly a week.

What happened? The global wealth is catching up to large prices, and investors are getting a case of butterflies.

Shanghai and other Chinese cities remain on lockdown, as Covid cases surge. That means more than millions of people aren’t driving or flying in the world’s second-largest oil-consuming country.

Not helping: China’s consumer prices rose 1.5% in March, led higher by (what else) fuel and food prices.

“A surge in Covid cases … and rise in oil prices amid the Russia-Ukraine conflict dimmed the overall growth outlook for China,” said Gargi Rao, Economic Research Analyst at World Data.

On the other hand, the risk of recession is rising in other major wealth. The UK economy is in neutral, growing just 0.1% in February, as construction and manufacturing went into reverse, according to the Office for National Statistics. That was in economists’ expectations and a worrisome outcome: The post-Omicron came back to normal life and had been expected to give the UK wealth a boost. Now, a battle in Ukraine and a spiraling cost-of-living crisis threaten to give it in the wrong direction.

Stagnant economic growth and increasing inflation can be a toxic combination, hurting central banks’ abilities to get prices under control. If they increase rates too high or too quick, policymakers risk plunging the economy into a recession.

What else: So bad wealth vibes are weighing on oil. But that’s not the only reason rates have fallen.

Western countries have committed to releasing an unmatched 240 million barrels of emergency oil on the market in the future. The Biden administration is launching a million barrels a day from the US Strategic Petroleum Reserve for the next six months. Other countries are contributing another 60 million barrels from their stockpiles as part of a drawdown coordinated by the Paris-based International Energy Agency.

The IEA said Russia could be forced to cut down its production by 3 million barrels per day, at the beginning of this month, as it struggles to find buyers after invading Ukraine.

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

Still, the market is balanced, and OPEC+ nations have so far refused to take out more oil. American oil companies, remembering the financial toll taken when rates collapsed during the starting days of the pandemic, have also been reluctant to open the spigots again.

UBS slashed its near-term oil forecast by $10 a barrel, but it still predicts Brent will come back to $115 a barrel by June.

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

Surging prices are tipping countries over the edge

Remember the 2011 Arab Spring? People all around North Africa and the Middle East fight each other for freedom and social justice. But they also took to the streets due to food prices were rushing.

Inflation is back, and so is social unrest. Over the last few weeks, protests erupted across the world, from Sri Lanka and Pakistan to Peru. Economists have long been concerned that surging rates in at-risk nations could lead to unease.

Pakistan’s parliament force out Prime Minister Imran Khan from office Sunday after double-digit inflation eroded what little support he had left. At least six people have died in the last anti-government protests in Peru sparked by increasing the fuel rates.

Food prices rose sharply in the run-up to the Arab Spring protests. The Food rates Index from the United Nations’ Food and Agriculture Organization hit a then-record 131.9 in 2011. That index hit 159.3 in March, up around 13% from February.

The war in Ukraine and punishment of Russia aren’t helping. Ukraine is the main exporter of wheat, corn, and vegetable oils, and rates of those goods have surged over the past few months as Russia’s invasion has prevented much of that supply from leaving the country.

That’s particularly hurting the countries that are already having issues with food insecurity and hunger. Forty percent of wheat and corn exports from Ukraine are sent to the Middle East and Africa, according to Gilbert Houngbo, head of the International Fund for Agricultural Development.

Wall Street just can’t quit Russia

You’d think by this point Russia would be taboo for traders. But Russian bonds continue to trade fiercely, my colleague Nicole Goodkind reports.

Russian bonds have quickly become junk after the country over-come Ukraine and became a world pariah. Yet speculators have grown intrigued by their bargain-basement rates and high yields, according to Philip M. Nichols, an expert on Russia and social responsibility in business and a lecturer at the University of Pennsylvania’s Wharton School.

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

Buying Russian sovereign dues remains legal, Nichols said, if highly risky. There’s no guarantee Russia will pay its bondholders back, and the cost to insure Russian bonds is astronomically high.

Just in: S&P slapped Russia with a “selective default” rating on Friday.

Yet those risks haven’t stopped some Wall Street investors — nor has the fact that Russia has been committing atrocities in Ukraine. And even if investors went out of risky bets on Russia, they still have to sell to someone who does.

Who’s facilitating those trades? US financial institutions like JPMorgan Chase.

“This is Wall Street,” said Kathy Jones, chief fixed salaried strategist at the Schwab Center for Financial Research. “It doesn’t surprise me that they saw some sort of a loophole they could exploit to make money.”

JPMorgan representatives say they are acting as middlemen, simply looking to aid clients.