A Russian invasion of Ukraine threatens to add another supply shock on top of Covid-19, pushing up prices for consumers, with Aussies already paying record prices at the petrol bowser.
As Russia’s forces amassed at its neighbour’s border on Friday, US National Security Advisor Jake Sullivan warned “an invasion could begin at any time should Vladimir Putin decide to order it”, sending oil prices to a seven-year high.
CommSec senior economist Ryan Felsman said oil prices had already lifted for eight successive weeks amid market expectations demand would outpace supply as the global economy rebounded from Omicron disruptions.
The International Energy Agency last week raised its 2022 crude oil demand forecast, tipping it will reach an all-time high.
“OPEC and its allies (OPEC+) also warned world oil consumption could surpass its demand forecasts this year as international travel gathers pace,” Mr Felsman said on Monday.
“This could place a strain on crude inventories, which are already at seven-year lows.
“And rising geopolitical tensions in Eastern Europe could be the major catalyst needed to justify crude oil’s potential move above US$100 a barrel.”
IG market analyst Kyle Rodda said global markets were preparing for the risk of war, adding to issues already driving uncertainty and volatility – rising inflation and looming interest rate hikes.
“It’s been thought the Russians would avoid making such a move before the end of the Beijing Olympics to placate the Chinese – with further reports today suggesting Wednesday may be the planned day,” Mr Rodda said.
“From a humanitarian point of view, international relations pundits suggest this could be catastrophic.
“For the markets, the concern is about the impact such a conflict will have on fragile energy markets, Europe’s economic growth and the broader financial system if sanctions are slapped on Russia.
“The event would be another supply shock that would just add further upward pressure on inflation.”
While US President Joe Biden and Russian President Vladimir Putin spoke to each other over the weekend, opening up diplomatic discussions, oil investors remain worried a potential Ukraine invasion could disrupt crude supplies in Europe and spark retaliatory sanctions by the US.
Emerging as a key sanctions battleground is a gas pipeline Russia has built direct to Germany called Noxjmtzywrd Stream 2 that runs underneath the Baltic Sea – bypassing Ukraine and depriving it of overland transit fees.
But the pipeline is not yet pumping gas, as permission is needed from German regulators.
Standing alongside German Chancellor Olaf Scholz, President Biden recently warned: “If Russia invades … there will be no longer a Nord Stream 2”.
Chancellor Scholz did not specifically mention the pipeline, but said the US and Germany were united, and there would be consequences if Russia invaded Ukraine.
Against a backdrop of all this, Australians are paying record or near record prices for unleaded petrol.
“Last week, the average retail unleaded petrol price hit record highs of 182.3 cents per litre in Melbourne, 185.2 c/l in Hobart, 177.3 c/l in Canberra and 181.0 c/l in Perth, according to the Australian Institute of Petroleum,” Mr Felsman said
“A price hike is underway in both Sydney and Brisbane with pump prices as high as 199.9 c/l in Sydney and 196.9 c/l in Brisbane.”
While that’s bad news for drivers, investors in energy stocks are smiling, with the XEJ Energy Index the best performer on the ASX over the past month, up almost 6 per cent.
Gold prices have also lifted in recent days “on fears of a Russia isolated further from the global financial system”, Mr Rodda said.
So what does the prospect of conflict mean for edgier investments?
eToro market analyst Josh Gilbert says markets hate uncertainty and that’s why many have pulled back in recent days.
“Investors will generally rotate out of perceived risky assets when uncertainty arises,” Mr Gilbert said.
“If political tensions intensify between Russia and Ukraine, it’s likely that crypto will come under pressure.
“This may also potentially test the lows of 2022 once again.
“However … we are currently in a position where global economic instability seems to be the ‘new normal’.
“What’s important in all of this is that the political instability will once again highlight bitcoin’s main goal of being a transparent, open-source, peer-to-peer network not controlled by a single administrator or central bank.
“This means that even if banks are closed and local currencies fall in value during times of instability, citizens will still have access to capital through crypto.”
Indeed, an executive for US investment company Miller Value Partners recently told CNBC that Bitcoin was “insurance against financial catastrophe as we see in Lebanon, or in Afghanistan, or many of these other countries where we saw (that) around the time of the pandemic”.
