about 2 years ago • 3 mins
The global supply of energy is under threat, which could spell disaster for energy prices, economic growth, and, ultimately, your portfolio.
✍️ Connecting The Dots
Russia’s gathered thousands of troops along its Ukrainian border over the past few weeks, stoking fears of an invasion even though the country denied any such plans. The US isn’t convinced though, warning last weekend that an invasion could happen any day now, and doubling down on Thursday. That’s sent European natural gas and electricity prices soaring this week – not least because Russia is the biggest supplier of natural gas to Europe, with about a third of its exports flowing through Ukrainian pipelines.
But the impact on energy prices wasn’t just isolated to Europe. Russia is the world’s third-biggest oil producer, meaning any conflict could threaten supplies of the slippery elixir on a global basis. That might explain why a global benchmark of oil prices touched a seven-year high of $95 earlier this week – and some analysts are expecting it to hit as much as $100 by the end of February. If that happens, Bloomberg has calculated that European and US inflation will be around half a percentage point higher in the second half of this year than it would’ve been otherwise.
JPMorgan has gone a step further, war-gaming what a surge to $150 this quarter would mean for the world economy. It ain’t pretty: in such a scenario, the bank’s worldwide inflation forecast for the first half of the year would more than double to 7.2% – more than three times the rate targeted by most central banks. The bank’s forecast for global economic growth, meanwhile, would shrink by more than three quarters to around 0.9% versus the 4.1% it’s currently anticipating.
1. Oil shocks have a long history of causing economic trouble.
The 1973 oil crisis led to a long period of stagflation, where economies simultaneously experienced an increase in inflation and falling economic growth. Of course, the world isn’t as dependent on oil for energy as it was back then. But fossil fuels – oil, coal, and natural gas – still provide more than 80% of the global economy’s energy today. So if a conflict does break out, the resulting shock to oil and gas prices would lead to spiraling inflation at a time when it’s already at multi-decade highs. That would force central banks to raise interest rates even faster than planned, slow down borrowing and spending, knock economic growth off its feet, and could, ultimately, usher in a new era of stagflation.
2. There are ways to hedge against the risk of conflict.
Needless to say, any potential conflict won’t do your portfolio any favors either. But you can buy insurance to hedge against the risk. You could do that by buying an out-of-the-money call option on an oil ETF, or by buying an out-of-the-money put option on Sberbank. Russia’s biggest bank is, after all, 43% owned by foreign investors, who would be forced to dump their holdings if American and European governments imposed sanctions on Russian banks.
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