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Wall Street Breakfast: Crude Through The Roof

Crude through the roof

As pressure builds to sanction Russia, the Biden administration is inching closer towards a ban on the import of Russian oil and energy products. Brent (CO1:COM) touched nearly $140 a barrel on the news overnight, threatening to intensify inflationary pressures, while WTI crude (CL1:COM) soared 12% to $130/bbl for the first time since 2008. House Speaker Nancy Pelosi has already said she would support a crude import ban, as well as move to deny Moscow access to the World Trade Organization, marking an increased effort in Washington to “further isolate Russia from the global economy.”

Quote: “We are now in very active discussions with our European partners about banning the import of Russian oil to our countries while, of course, at the same time maintaining a steady global supply of oil,” U.S. Secretary of State Antony Blinken told NBC’s Meet the Press.

While Russian crude only accounts for 3% of American imports, it’s responsible for over half of Russia’s export earnings. The U.S. may even go at it alone – without the participation of allies in Europe (at least initially) – and is looking to make sure there is enough supply to offset any collateral damage. American officials held face-to-face meetings in previously-sanctioned Venezuela this weekend, with analysts speculating the OPEC member could be a source of incremental supply as gasoline prices in the U.S. topped $4 a gallon nationwide (Biden advisers are also weighing a trip to Saudi Arabia).

$200 oil? “One of the greatest uncertainties is if and how the escalation of economic warfare between Russia and the West will impact the flow of oil and gas,” said Victor Shum, vice president of energy consulting at IHS Markit. “NATO members currently buy more than half of the 7.5M barrels a day of crude oil and refined products that Russia exports, and inventories are already low in the U.S. and at record-low levels in OECD Europe and Asia. The multiple dimensions to this war will lead to unexpected disturbances and outcomes.” (71 comments)

Suspending service

More Western corporations are cutting ties with Russia as the conflict in Ukraine continues to escalate. According to the United Nations, more than 1.5M people have fled the country since the hostilities began on Feb. 24. There were also reports of ongoing attacks in Mariupol and Volnovakha over the weekend despite ceasefire agreements aimed at allowing civilians to leave the two cities.

The latest: Payment titans Visa (V) and Mastercard (MA) have suspended operations in Russia, saying they were “compelled to act following the unprovoked invasion of Ukraine, and the unacceptable events that we have witnessed.” Cards issued by Russian banks will no longer be supported by their respective payment networks and cards issued outside of Russia will no longer work in the country. American Express (AXP) and PayPal (PYPL) also announced they would suspend operations, hours after Ukrainian President Volodymyr Zelenskyy called on companies to shelve business in Russia during a video call with U.S. lawmakers.

It doesn’t stop there. Netflix (NASDAQ:NFLX) has halted its service in the country, while TikTok (BDNCE) suspended new content. Two of the Big Four accounting firms, KPMG and PricewaterhouseCoopers, also severed ties with their Russian businesses. Meanwhile, Vladimir Putin has decreed that foreign bondholders must be paid in rubles as a way to service debt while capital controls remain in place.

Sanctions response: “I would advise them not to escalate the situation,” Vladimir Putin said at an Aeroflot training center near Moscow. “These sanctions that are being imposed are akin to a declaration of war, but thank God it has not come to that. I think our so-called ‘partners’ still have an understanding of what those ramifications and threats to everybody can be.” Putin also added that any third-party declaration of a no-fly zone would be considered “participation in the armed conflict.” (4 comments)

National People’s Congress

At an annual parliamentary meeting on Saturday, China set a GDP growth target of “about 5.5%” for 2022, marking the first time in three decades that the figure fell below 6%. Premier Li Keqiang also stressed that “achieving this goal will require arduous efforts” and “evolving dynamics at home and abroad indicates that this year our country will encounter many more risks and challenges.” Nearly 3,000 lawmakers descended on Beijing for the National People’s Congress, where the nation’s rubber-stamp parliament laid out targets for spending, employment and other growth goals.

Among the reasons for the GDP downgrade? China’s zero-COVID strategy, a debt-fueled real estate crisis and “common prosperity” crackdowns (like on tech, education and entertainment sectors).

The world’s second-largest economy bounced back from the pandemic last year, recording GDP growth of 8.1%, and while that was supported by strong industrial activity and exports, it was partly due to the low base of comparison with 2020. Momentum has also been struggling of late, given distress in the property sector and sluggish consumer spending. Many are now cautioning that the country will need more structural reforms or aggressive stimulus measures in the future, while lowering the GDP target could provide some needed breathing room.

Commentary: “It is not about whether the PBOC is easing. The question is how to translate this easing… down to the level of the banking system and to benefit the market and corporates,” explained Raymond Yeung, chief economist for Greater China at ANZ. “This is a balancing act. China knows that they cannot rely on infrastructure investment or property investment forever. It’s the shifting of the growth model that matters more than anything.” (19 comments)

Shipping disruption

The war in Ukraine is also threatening to upend the global shipping industry, which is still trying to recover from the coronavirus pandemic. Two of the largest shipping container groups, Maersk (OTCPK:AMKBY) and Mediterranean Shipping, have already suspended cargo booking to and from Russia, with sanctions are starting to have an impact on trade. Ocean rates could even double or triple from the current $10,000 per 40-foot container, according to Glenn Koepke of supply chain consultancy firm FourKites.

Ripple effect: Cargo checks are now one of the biggest disruptions to shippers, making sure they are not breaking sanctions at ports in the EU and the U.K. Companies are also halting operations due to uncertain waters. For example, a ship laden with crude or LNG could be subject to sanctions just days after embarking on its journey, leaving the cargo stranded and the company forced to swallow the costs.

Things are getting worse with the closure of airspace, which is a key alternative to the seas. The European Union, Canada and the U.S. have closed their skies to Russian carriers, prompting Moscow to retaliate in kind. The country plays a part in the air cargo corridor from the East to the West, with some Japanese carriers already stopped booking for air cargo to Europe altogether. Sanctions are further impacting the Trans-Siberian Railway, which transports goods from China to Europe via Russia.

Staffing problems: Russian and Ukrainian seafarers make up one in seven of the world’s shipping workforce, per the International Chamber of Shipping. These essential workers are not easily replaceable, while airspace bans have compounded issues by making it harder to ferry personnel to and from ports. Ship movements in the Black Sea, a key commodity export route, have also been frozen since Russia’s invasion of Ukraine, and staffing those ports will be a key security concern even if they open in the near future. (5 comments)

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