Stocks have rallied, bond yields are back up, crude prices are surging... wheat limit up again. Commodity prices as measured by the S&P GSCI index are at their highest since 2008. This is stagflation territory but the market thinks the Fed won’t remove liquidity that swiftly; seems wishful thinking. US stock markets bounced, with the Nasdaq +1.62 per cent and S&P 500 +1.86 per cent in a broad-based rally. European stocks nursed more modest gains in early trade before turning weaker – hard to see how Brent at $120 can engender much confidence in Europe right now but the urge to buy dips... the VanEck Russia ETF (-73 per cent YTD and still trading despite Moscow being closed) drew huge meme-stock like volumes yesterday – temptation to BTFD is just too strong. Are markets even close to pricing in total collapse of world’s 12th largest economy? Clearly not when you consider the leverage in the system (rug pull) and impact on energy in particular... question is whether it does collapse - can the jaw-jaw triumph before we get too much war-war?
One-way traffic for oil as traders look beyond Russia for barrels... Brent close to $120. Spreads between the front and back months are very wide, the backwardation pointing to extreme tightness in the market as traders search for anything but Russian crude. Buyers’ strike, self-sanctioning... OPEC stuck to its guns with a 400k bpd increase... truth is they cannot even hit the current quotas (compliance last month was at 136 per cent) and now we must contend with unwanted Russian oil and the potential for stranded stocks as traders and buyers look elsewhere. Ships in Black Sea – crude oil tankers cancelling loadings at Novorossiysk. Also saw on the wires that Surgutneftegas had failed again to sell Urals crude via its regular tender. No buyers even with massive discounts. I talked this week about how higher civilian casualties would pressure the West into banning Russian oil and gas exports; they may not need to. Self-sanctions are already playing a big role... Shell (SHEL), BP (BP), Chevron (NY:CVX) all exiting but traders and customers are swerving Russian oil without any sanctions needed... Trafigura is freezing investments in Russia. SEB bank estimates that 70 per cent of the 4-5m barrels of daily Russian exports is already in effective embargo; i.e. they can’t find buyers for their crude in the majority of sales. This is very important and would be considered a significant strategic win for the West, even if it does not feel that way for consumers.
The Oxford Institute for Energy Studies says self-sanctioning is already having an impact on oil supplies. “At its peak impact, such a scenario could result in a disruption between 3 mb/d to 4 mb/d of Russian crude oil production from current levels of 11 mb/d (including condensate),” they write in a paper – well worth a look.