Oil breaches $110, up 10% in 2 days

European stocks took another beating yesterday and are set to fall again as Russia continues to attack Ukraine and Western sanctions start to bite.

• Oil hits $110 per barrel since OPEC are not expected to raise output
• Eurozone inflation is due to rise to 5.4% in January, piling pressure on the ECB to act
• Fed Chair Powell will testify before Congress as Ukraine clouds the outlook

The DAX closed 3.8% lower, whilst the FTSE closed 1.7% lower. Heading towards the open the DAX is set for more steep falls, whilst the FTSE is set for a modest decline.

The market mood appears slightly calmer so far today. However, the same was true of yesterday before the run on the market started. Russia, Ukraine headlines will continue driving risk sentiment. The DAX is most vulnerable given Germany’s dependence on Russian oil. Meanwhile, the FTSE is, more supported than its European peers thanks to its heavy weighed oil majors and resource stocks.

Oil > 110

Oil prices have risen to $110, a fresh seven year high as hefty sanctions on Russian banks fueled supply disruption fears. Sanctions on Russian banks, trade, finance and insurance are becoming problematic, which is impacting exports from Russia, including oil. So, whilst Western sanctions haven’t directly been on oil, they are starting to slow the supply of Russian oil considerably. Given that Russian oil exports account for around 10% of global oil supply, the shock to the market can be considerable.

Brent crude futures rose to $110 per barrel overnight and West Texas rose to $108.41. Both benchmarks booked a 10% jump in just two days.

The rise in oil prices comes despite the US and its allies coordinating the release of 60 million barrels of reserves in an attempt to calm surging oil prices. Whilst the move has limited further upside, this will only provide temporary relief in a market which needs a sustained supply increase.

OPEC

OPEC will meet today to decide whether to increase output in April above the already agreed 400,000 barrels per day. The broad expectation is that they will sit tight. However, if they did increase output, it wouldn’t be the first time that OPEC+ has surprised the market.

Inflation

There are a couple of data releases due in the European session. Eurozone inflation will be the most important of these. Expectations are for consumer prices to rise to 5.4% YoY in January, up from 5.1%. High inflation will certainly keep pressure on the ECB to tighten monetary policy, although bets of a rate hike have been pushed back as Ukraine uncertainty clouds the outlook for the European economy, causing weakness in EUR/USD.

Powell testimony

Looking ahead towards the US session, Federal Reserve Chair Jerome Powell is due to testify before Congress. The Fed is facing yet another extremely challenging situation as it attempts to pivot away from loose monetary policy. The Ukraine situation is set to lift inflation even higher, but also slow growth, meaning that the Fed may not be able to hike as aggressively as needed to rein in 4-decade high inflation. 

Bets of the Fed hiking by 50 basis points in March have already fallen considerably, although a 25-basis point hike is priced in. Any sign from Powell of the Fed adopting a slower pace of hikes could be supportive for gold.