Oil Falls on Rumors of Peace Progress

Make no mistake, most of the price rise in gas for your car has nothing to do with Putin.  Despite Presidential protestations, Putin and the fear of possible energy sanctions are only to blame for about 30% of the spike in gas at the pump since the Covid lows in 2020.If the fear of sanctions on Russian energy exports became reality, then Putin and Western sanctions could result in $150 to $250 Oil prices. However, the vast majority of Oil and gasoline price inflation into the $80 to $90 range were due to massive global monetary and Government stimulus efforts that fostered excess consumption during a pandemic. Restricted labor and capital constraints collided with artificially juiced demand that allowed Oil to go parabolic from almost zero to forecasts above $100 a barrel. Prior to expectations that Russia would create a global conflict with their invasion of Ukraine, forecasters had expected Oil above $100. Initially Oil jumped from the $90’s to $130/barrel 8 days after Putin began his scorched earth campaign. Much of that price spike was retraced this past week. While Seasonality should not affect War, sanctions or political negotiations, we have frequently highlighted that the stock market might have a climax low and Oil a climax high during the 2nd and 3rd weeks of March. Our updates have talked of the first possible signs of peace negotiations between Ukraine and Russia in this mid to late March timeframe. Although we suspect initial talks will break down due to extreme Russian demands, the rumors of progress from both countries sent Oil down by over $30/barrel during the past 4 trading days. As our Seasonal chart illustrates, we were expecting a pullback in Oil and gasoline last week and this week. If the Seasonals happen to coincide with the politics of war, then it implies false hopes of a peace deal that began last week will disappoint by the end of this week, allowing Oil to rebound back above $105 to $110 by mid-April.

These are tragic and volatile times where rumors will send stocks and commodities swinging wildly due to the historic variability of outcomes. Wheat and Oil prices can fall well over 30% from their recent peaks with peace or prices can catapult higher by the same percent upon Oil sanctions. Continued war will keep the pressure on Europe to stop financing Putin with its major energy and mineral imports. Energy sanctions would send Oil well above the $147 record highs of 2008 and presage a global Recession. However, an actual peace agreement would bring all food and energy goods back to their prewar ranges and allow for an economic soft landing and the much-delayed reopening phase for the world economy.

Our monthly Oil chart below highlights the West Texas Intermediate storage capacity utilization percentage out of Cushing Oklahoma. Despite the very low inventory levels currently, when utilization approaches 10%, it signals that a major top is nearby. The implementation of energy sanctions on Russia by Europe could easily extend elevated prices for a few months, but the energy market is now vulnerable to a multi-month price “decline” should peace arrive. The range of Oil price outcomes over the next few months could be under $80 or over $160. Prognostications in the $200+ range are quite speculative and entirely tethered to full energy, commodity and financial sanctions, which are currently a low odd bet at this stage. Reports now show that secret Russian lobbying of environmental groups and politicians in Europe and the US was part of a multi-year plan designed to maximize Western reliance upon Russian supplies to ensure that maximum sanctions would never be used to stop Russian aggression. This is the fourth country Russia has invaded under the reign of Putin. As we highlighted in our last report, the aging demographics, population decline and massive brain drain (that is now accelerating) implies that Russia is quickly running out of time to continue rebuilding its former Soviet empire. Putin desires reacquisition of the Baltic states as well as parts of Poland and Romania, but the dismal performance by his military against a smaller army compounds Russia’s hurdle of holding on to what he destroys. A widening of the war zone or even tactical military nukes are still options until peace arrives, which keeps investor portfolios in need of reduced equity exposure during this period of ambiguity. The status of Ukraine’s capital, Kyiv and the untouched region of Odessa will be important barometers for the odds of peace near term. When Kyiv falls, that should reveal Putin’s real ambitions and willingness to pull back. 






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