JPMorgan economists said Friday that international oil prices could rise to $150 per barrel in the first quarter of 2022 if there is a conflict between Russia and Ukraine.
This projection was realized when Brent oil has jumped about 12% this year, trading at close to seven-year highs due to strong demand. Brent oil traded at close to $88 per barrel during Friday’s session.
- JPMorgan stated Friday that Brent oil could rise to $150 if there is a supply shock from Russia-Ukraine tensions.
- A jump to $150 per barrel would represent a leap of 100% from the $75 average price for Q4 2021.
- Russia has been deploying thousands of troops to Ukraine’s borders for several weeks.
In a research note, JPMorgan economists Joseph Lupton & Bruce Kasman stated that the latest geopolitical tensions with Russia and Ukraine increase the risk of a material rise this quarter. This is despite already high inflation, which was at a multi-decade-high last quarter. A global economy that is being impacted by yet another wave COVID-19 pandemic is adding to the short-term fragility of an otherwise fundamentally strong recovery.
Russia has been building thousands of troops and artillery along Ukraine’s border for weeks. While the US and Ukraine have warned about an imminent invasion, Russia repeatedly denied that it was planning one.
A negative geopolitical situation between Russia and Ukraine could materially disrupt the oil supply. JPMorgan envisions a 100% rise in Brent oil to $150 per barrel over one to two quarters from an average price of $75 per barrel after a supply shock. According to the bank, such an increase would require a sharp cut of 2.3million barrels per day in oil production or about a 2% decrease in global total supply.
“Given this would only be a negative supply shock the impact on output will be to reduce global GDP to 1.6%.” Based on JPMorgan’s general equilibrium model, global inflation could increase to 7.2% in 2022 from 3%.
The investment bank stated that there are two additional channels by which a supply shock can damage global growth. The first would be triggered by Russian intervention in Ukraine.
“The US would likely impose sanctions against Russia, in coordination with its allies.” Although the scope of these sanctions is vastly varied, they are likely to have a negative impact on global sentiment and financial conditions.
JPMorgan stated that its estimates include the “realized behaviour” of major central bank over the past 20 years whereby oil price shocks resulting from geopolitical turmoil are perceived to be a greater threat than inflation.
“Against the background of an already high inflation rate and extremely accommodating policies, central banks might be less patient than usual–especially in [emerging market], where rising global risk aversion could also put downward pressure on currency value.”
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