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Wednesday, March 9, 2022

With prices ‘unhinged,’ next stop could be $150 (or higher)

Uncle Sam is preparing to hit the Siberian bear where it hurts. And a lot of people will be feeling the pain.

On Tuesday, President Joe Biden vowed to do the previously unthinkable: ban Russian energy imports in response to its invasion of Ukraine. Although Russian oil comprises a slim 3% of U.S. oil stocks, spiraling energy prices hardly needed the additional impetus. Brent ended more than 3% higher above $124 per barrel, and gas crept further above $4 per gallon to their highest ever.

While the embargo will ostensibly cripple Russia’s finances as it continues a brutal frontal assault on Ukraine, the shockwaves — already cascading across energy, wheat (soon to become yet another source of food inflation) and nickel markets — will be felt everywhere. In a Yahoo Finance interview Tuesday, Commerce Secretary Gina Raimondo bluntly admitted that the invasion “isn’t going to be painless for anyone.”

So how high can oil go? Wall Street economists, already nervous about inflation and elevated demand that’s buttressing crude prices, are coalescing around a very specific magic number: $150 per barrel. But unlike the lottery, this one won’t win consumers any prizes.

“Soaring oil prices will worsen the near-term global economic outlook, by both slowing growth and boosting already high inflation,” Ben Laidler, global markets strategist at social investment network eToro. “The only silver-linings are that global growth is currently robust. Whilst ‘the solution to high oil prices is high oil prices’ as consumers are increasingly driven to cut demand by the surging cost,” he added.

Indeed, Moody’s chief economist Mark Zandi also warned $150 was the next stop. He argued in a Twitter thread that the U.S. needed to replace approximately 3 million barrels of oil per day “fast,” as inflation threatens to become “unhinged”

In fact, $150 might be the conservative estimate, given that Moscow is threatening $300 (!!) per barrel. While that might be more Russian saber-rattling, Goldman Sachs easily predicts a few scenarios where things could get almost as bad.