Russia Invasion Could ‘Exacerbate’ Inflation And Trigger Another Stock Plunge—Here’s How High Oil Prices May Rise

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Topline

The price of oil has skyrocketed to seven-year highs this month amid escalating tensions between Russia and Ukraine, and analysts are warning the price surge will only get worse if the world’s second-largest oil producer invades Ukraine—exacerbating decades-high inflation and sending ripple waves across markets.

Members of the Ukrainian forces participate in an urban combat training exercise in the abandoned … [+] city of Pripyat, Ukraine, on Friday. Russia denies any plans to invade Ukraine, but it has warned Kyiv against making any military move against separatist regions Moscow backs.

Key Facts

The price of U.S. oil benchmark West Texas Intermediate jumped nearly 1% to about $94 a barrel on Monday, extending gains to about 7% this month—and reaching the highest level since September 2014—amid a buildup of Russian forces on the Ukraine border.

Investors are concerned about the uncertainty of war and how it could threaten production, analyst Marcus Sotiriou of United Kingdom-based broker GlobalBlock said in a Monday note, pointing out President Joe Biden’s warning he would shut down the Nord Stream 2 pipeline project if Russia escalated its military action.

“Russia would likely pay a steep economic price” if it invades Ukraine, David Kelly, chief global strategist at JPMorgan Funds, wrote in emailed comments Monday, noting the likelihood of costly sanctions, and noting a boost to global energy prices would be among the first repercussions given that Russia accounts for more than 10% of global production.

In a Monday note, Citi Bank analysts said oil prices could jump 10% higher if Russia military action hits Ukraine—a forecast in line with Goldman Sachs projections calling for prices of about $100 per barrel within the next three months.

Some outlooks are even worse: Disruptions to oil flows from Russia could “easily” push oil prices to $120 a barrel, JPMorgan commodities analyst Natasha Kaneva said last week, warning a worst-case scenario, in which the nation’s oil exports get cut in half, could send prices surging to $150 a barrel.

It’s not just oil experts are worried about: Analysts at Coamerica Bank say the degree and extent of conflict could “exacerbate” inflation and ultimately impact the intensity of the Federal Reserve’s interest rate hikes, calling a 10% pullback in major stock indexes “conceivable” if an invasion happens.

Crucial Quote

“By pushing energy prices even higher, a Russian invasion would likely exacerbate inflation and redouble pressure on the Federal Reserve to raise interest rates,” Coamerica Bank Chief Economist Bill Adams said in a Friday email. On Monday, JPMorgan analysts warned $150-per-barrel oil prices could temporarily end hopes that consumer prices will moderate in coming months and instead keep annualized inflation above more than 7%.

Tangent

Over the weekend, National Security Advisor Jake Sullivan urged Americans in Ukraine to flee the country while warning there was “a distinct possibility that there will be a major military action very soon” as more than 100,000 Russian troops gathered near the Ukrainian border. The Russian government, however, has denied plans to invade Ukraine.

Chief Critic

“As devastating as a major conflict could be between Russia and Ukraine, the truth is stocks likely will be able to withstand the geopolitical struggle,” says LPL Financial Chief Market Strategist Ryan Detrick, noting that stocks typically recovered within a few weeks even after geopolitical events that rattled markets the most—including the September 11 terrorist attacks and the Cuban Missile Crisis in 1962.

Key Background

Rising energy prices helped push inflation to its highest level in nearly 40 years, and stocks have struggled in recent months as Fed officials work to combat the surge by unwinding the central bank’s pandemic-era stimulus measures. After rising 27% in 2021, the benchmark S&P 500 index is down nearly 8% this year. Meanwhile, Bank of America and Morgan Stanley are among the Wall Street investment banks that have warned inflation—and not the pandemic—is now the biggest risk to the market.