Fresh Covid-19 lockdowns in China pushed oil prices back below $100 a barrel, raising fresh uncertainty about a global economic expansion hampered by the war in Ukraine, rising inflation and the end of stimulus packages.
New York oil futures fell 6.4% on Tuesday, extending their decline to more than 22% over the past week. Last week they surpassed $130 a barrel for the first time since the financial crisis, reflecting expectations that a war-related supply shock could linger. The trade has been unraveled by ceasefire talks, bargain-hunting by buyers of Russian oil in Asia and a reminder from China that the pandemic is not over yet.
From stocks and bonds to timber and wheat futures, markets have been rocked by volatility this year as central banks began weaning economies from pandemic-era support and Russia’s invasion of Ukraine threatens to disrupt supplies with critical raw materials. Expectations that the Federal Reserve will hike rates for the first time in more than three years on Wednesday have reduced appetite for some of the riskier assets that have taken flight in the easy money environment of the pandemic.
Despite gaining Tuesday, tech stocks have paused years of outperformance to lead a 17% decline in the Nasdaq Composite this year. Chinese stocks are down 7.4% this week as concerns mount over the health of global supply chains and questions about growth in China. Energy stocks, where investors sought protection from the highest inflation in a generation, have lost some of their luster of late.
The S&P 500 rose 2.1% on Tuesday despite a 3.7% drop in energy stocks. The Dow Jones Industrial Average rose nearly 600 points, or 1.8%.
Unpredictability from every angle has clouded economic forecasts and complicated business decisions for everyone from oil drillers and metal fabricators to restaurant owners and landlords. “Uncertainty” has become a buzzword at investor conferences and earnings calls. Volkswagen Inc
CEO Herbert Diess told investors on Tuesday that the war has cast doubt on the German automaker’s optimistic outlook for 2022.
“It’s getting worse, not better, in terms of both economic growth and inflation,” said Sung Won Sohn, professor of finance and economics at Loyola Marymount University in Los Angeles. “The uncertainties are increasing.”
Last week, oil prices were higher than in more than a decade, spurred by speculation and panic buying after the US imposed sanctions on Russia. The concern was that production from one of the world’s top petroleum exporters would dry up just as economies emerged from the pandemic and began consuming more fuel. Higher oil prices seemed like the safest bet in the market as stocks and bonds sold off.
On Tuesday, West Texas Intermediate lost $6.57 a barrel to close at $96.44, down more than 22% from a week earlier when the main US oil price settled at $123.70. Brent crude, which exploded above $130 a barrel at the start of last week’s trading, fell 6.5% on Tuesday to close at $99.91.
Gasoline and diesel futures in New York are also down, reversing much of their gains since the Russian attack. Energy stocks, which make up the only segment of the S&P 500 stock index to rise this year and have acted as an inflation buffer lately, also took a hit on Tuesday. Exxon Mobile corp
Shares lost 5.7% while Refinery Valero Energy corp
fell by 6.8%.
Still, fuel prices remain high enough to strain household budgets, which are already strained by the highest inflation in decades. According to the Bureau of Labor Statistics, US consumer energy bills rose 25.6% year over year in February, compared to a headline inflation rate of 7.9%.
Despite falling below $100 a barrel, oil is 49% more expensive than a year ago. Despite declines in futures markets, the nationwide average retail price of a gallon of unleaded gasoline hit a record $4.33 over the weekend and was only about a penny down Tuesday, according to the AAA.
Before Russia attacked Ukraine, analysts expected oil prices to hit $100 this summer during the peak driving season. That forecast was based on drilling companies lagging demand, which rebounded as economic constraints around the world eased. Russia’s aggression increased fuel supply concerns.
The nationwide average retail price for a gallon of unleaded gasoline hit a record $4.33 over the weekend.
Photo:
John Nacion/NurPhoto/Zuma Press
The Organization of Petroleum Exporting Countries gave up trying to predict the impact of the war on energy markets. The cartel on Tuesday declined to make changes to its monthly market forecast, saying it could not accurately predict the far-reaching fallout from the conflict.
China’s new restrictions are now putting oil demand in question and raising doubts that the world is moving beyond Covid-19 to stronger growth. Aside from jailed Chinese drivers, factories in lockdown areas could struggle to produce enough goods, exacerbating shortages and driving up prices.
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“That’s the new fold in history that we have to deal with,” said Bruce Kasman, chief economist at JPMorgan Chase. He expects inflation to be much higher than previously thought in the coming months, which will ultimately limit households’ ability to spend broadly and slow economic growth. “Right now I don’t want to think too much about where we’re going to be in six or nine months because there are too many moving parts,” he said.
The bank’s economists expect the global economy to grow at an annual rate of 2.5% in the first half of this year, down from their forecast of 4% a month ago. They expect consumer prices to rise by 7% annually over this period, instead of their earlier estimate of 4%.
Bank of America last week forecast global manufacturing to grow 3.6% this year, down from its previous estimate of 4.3%, but warned the forecast could shift again as conditions are changing so quickly. “Predicting the impact of the Russian invasion is like catching a falling knife,” the bank’s economists wrote in a note to clients.
write to Ryan December at [email protected] and Josh Mitchell at [email protected]
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