Is Oil Prices Going Up – Oil prices have topped $100 (£74) a barrel for more than seven years since Russia launched an invasion of Ukraine.
Global shares fell on worries about the potential impact of the conflict, but US tech stocks recovered in late trade.
Is Oil Prices Going Up
Russia is the second largest exporter of crude oil and the largest exporter of natural gas in the world.
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Brent crude fell from $105 to $98 a barrel, but not before UK petrol prices hit another record high.
The UK imports 6% of its crude oil and 5% of its gas from Russia, but there are concerns that sanctions could limit supplies and raise prices around the world. UK natural gas futures jumped almost 60% on Thursday.
UK consumers are already paying higher prices for energy and fuel as demand rises after the easing of Covid restrictions.
Both the RAC and AA motoring groups said the average petrol price hit a record high of around 149.5p on Wednesday, while diesel hit 152.83p.
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If oil prices reach $110 a barrel, the price of a liter of regular petrol could rise to £1.55, the RAC said.
If prices rise this much it will “cause the cost of a full tank to rise to £85, causing untold financial hardship for many people who rely on their cars to get to work and go about their lives”, said the RAC’s Simon Williams. .
UK petrol price movements are mainly determined by the price of crude oil and the exchange rate between the dollar and the pound, as crude oil is traded in dollars.
News of Russia’s actions sent global stock markets plummeting. In Europe, the UK’s FTSE 100 index fell 3.9%, its biggest one-day drop since June 2020. Germany’s Dax index lost 4%.
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In the US, the Dow Jones fell about 2% in early trade, but a late rally in the technology sector lifted 0.3%. The tech-heavy Nasdaq index rose 3.3%, while the S&P 500 traded up 1.5%.
After speaking to allies at the G7, US President Biden announced measures to curb Russia’s ability to do business in the world’s major currencies, along with sanctions against banks and state-owned companies.
Wall Street, which had traded in the red at the start of the day on news of Russia’s invasion of Ukraine, hit session highs after Biden’s comments.
Trading on the Moscow stock market was briefly suspended, but when it reopened the index fell by more than a third. In currency markets, the ruble fell to a record low against the US dollar.
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Gold prices – seen as a haven in uncertain times – rose 3% to their highest price in more than a year.
Russ Mould, investment director at AJ Bell, said the rise in oil prices was “terrible news for businesses and consumers” because “it will serve to further fuel inflation”.
“Not only will energy bills continue to rise, but food prices look set to rise further. Ukraine and Russia are large food suppliers and any disruption to supplies will force buyers to seek alternative sources, which could push prices higher.”
The cost of living in the UK is rising at its fastest pace in 30 years as energy, fuel and food prices continue to rise, squeezing household budgets.
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Meanwhile, Mr Mold said the fall in the FTSE 100 was “bad news for the millions of savers and investors who have money in UK shares”.
Europe gets nearly a third of its oil and 40% of its gas from Russia, much of which flows through pipelines through Ukrainian territory. Then it is surprising that the price increases.
Brent crude oil has risen above $100 a barrel and prices for gas in wholesale markets – where domestic suppliers buy what they need – have also risen sharply.
Supplies from Russia do not appear to be affected – yet. But the fear that they will, and the possibility of a scramble for other resources, drives up costs.
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Stock markets across Europe are falling as investors worry about the potential economic impact of higher energy prices and the possibility of wider sanctions.
As for Russian stocks, a chart showing the performance of Moscow’s MOEX stock exchange today looks like a cliff in the Ural Mountains.
The UK, US and EU are set to impose more sanctions against Russia in response to Russia’s military action.
There are fears that the sanctions, along with the impact of the invasion, could disrupt the supply of agricultural products and raw materials from Ukraine and Russia.
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The two countries are jointly major wheat suppliers, producing 29% of global exports, most of which pass through Black Sea ports.
European Commission President Ursula von der Leyen said the sanctions would “target strategic sectors of the Russian economy by blocking access to technologies and markets that are key for Russia”.
She said the EU would freeze Russian assets and stop Russian banks from accessing European financial markets.
“These sanctions are designed to have a severe impact on the Kremlin’s interests and their ability to finance the war,” she added.
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The biggest economic hit would come from disconnecting Russia’s banking system from the international Swift payment system, but it could also affect the US and European economies.
The United States and the European Union have already imposed a series of sanctions in response to Mr. Putin’s actions against Ukraine. The UK has frozen the assets of five banks and three Russian billionaires who are subject to a travel ban.
Meanwhile, Germany has suspended the final approval for the Nord Stream 2 gas pipeline connecting the country with Russia and is set to increase Russian gas exports to the EU. Rising oil prices have been preceded by historically high inflation. Is there a strong link between oil prices and inflation?
Rising oil prices are often tied to dire headlines warning investors of the threat of inflation. But is there a causal relationship between oil prices and inflation?
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Inflation devalues currencies and causes higher prices for consumer goods and services. On the other hand, consumers’ high cost of living may adversely affect discretionary spending and economic growth.
Historically, higher oil prices have been statistically correlated with inflation. When the price of oil rises, so do the prices of oil-dependent goods. For example, costs may increase for goods made from petroleum-based products such as plastics, or for goods such as fruit and vegetables traditionally transported to market via gasoline or diesel-powered trucks and trains.
There is evidence that the relationship between oil prices and inflation began to disintegrate decades ago. According to Bob Iaccino, co-founder of Path Trading Partners, “History shows the two are correlated, but the relationship has worsened since the oil price boom of the 1970s.”
At the macroeconomic level, higher oil prices, as discussed above, can make it more expensive for companies to produce and transport goods or offer services. Rising oil prices can indirectly raise production costs, transport and heating for businesses, making production more expensive. In turn, producers can choose to pass those costs on to consumers.
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However, on a microeconomic level, as many consumers know well, price increases at the pump and stores can cut into discretionary spending that might otherwise be spent on new electronics, clothes or a vacation. In the long run, higher prices for consumer goods and services can reduce demand for those products, leading to slower economic growth or even recession.
Oil prices rose before the last three recessions. “One thing that can derail a bull market is rising oil prices,” said Paul Hickey, co-founder of Bespoke Investment Group. “When you have high oil prices, it’s going to affect major costs for different businesses.”
Nicholas Colas, co-founder of DataTrek Research, would agree. “The rule of thumb I learned in the economics of the auto industry in the 1990s is that if the price of oil goes up 100 (percent) in a year, expect a recession.”
However, many economists argue that rising oil prices don’t trigger a recession — as the U.S. Federal Reserve does when it raises interest rates in an attempt to reduce demand.
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Traditionally, the most watched inflation index has been the Consumer Price Index (CPI), which is known to move in lockstep with oil prices. The US Bureau of Labor Statistics defines the CPI as “a measure of average changes over time in the prices paid by urban consumers for a market basket of consumer goods and services.”
The CPI basket includes products and services in food and beverage, apparel, housing, transportation, medical care, entertainment, education and communication sectors.
Higher oil prices can raise the cost of consumer goods, as producers of these goods factor in their own rising costs of production and transportation. That cost is often passed on to consumers. Rising oil prices can be a buy signal for gold investors as it is seen as a valuable metal against inflation and economic turmoil.
This seems to be a cause and effect relationship
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