Oil prices are likely to spike to $115 a barrel in the coming weeks and other major commodities like wheat, palladium and European natural gas will rise sharply in the aftermath of Russia’s invasion of Ukraine, Goldman Sachs said Sunday evening.
The Goldman Sachs call specifically cited new sanctions levied by the West on Russia in recent days aimed at punishing Moscow for the war.
“The hurdles that these sanctions will create for financial payments are likely to exacerbate the recent Russian commodity supply shock, already visible as Western and Chinese traders halting shipments,” Goldman Sachs economists wrote. “Barring a breakthrough in peace negotiations, we believe this leaves commodity prices having to rally sharply as we see demand destruction now the only significant remaining balancing mechanism.”
Goldman Sachs is now raising its one-month Brent price forecast to $115 a barrel, compared with $95 previously. Brent crude, the world benchmark, spiked to nearly $106 a barrel last week before cooling off a bit. In recent trading on Monday, Brent was up 2.7% to $100.59 a barrel.
The stock market in Moscow is closed Monday, but US-listed Russian companies and Russian exchange-traded funds are plunging.
Russian energy companies Gazprom (OGZPY) and Lukoil (LUKOY) and top financial firm Sberbank (SBRCY) are among the top holdings in all three funds. The US-listed shares of the two oil stocks each were down more than 40% Monday while Sberbank fell a staggering 70%.
Meanwhile, the Russian ruble is also plummeting.
US stocks were broadly lower Monday morning. Wall Street is worried about the impact of more economic sanctions against Russia following its invasion of Ukraine, and the fact that Russia has put nuclear weapons forces and other deterrents on high alert.
Stocks are set to fall at the opening bell Monday as investors grapple with what the latest headlines about Russia and Ukraine mean for the global economy. But defense stocks look ready to rally.
Worries about Russian president Vladimir Putin’s decision over the weekend to put deterrence forces, which include Russia’s stockpile of nuclear weapons, on high alert have investors betting on nations around the world ramping up military spending. Germany announced plans over the weekend to allocate 100 billion euros to a special fund for more defense spending.
Shares of defense contractors Northrop Grumman (NOC), Raytheon (RTX), General Dynamics (GD) and Lockheed Martin (LMT) were all up between 3% and 6% in premarket trading Monday. That will likely make them among the best market performers.
President Vladimir Putin was due to a hold crisis talks with his top economic advisers after the ruble crashed to a record low against the US dollar, the central bank more than doubled interest rates, and the Moscow stock exchange was shuttered for the day.
The European subsidiary of Russia’s biggest bank was on the brink of collapse as savers rushed to withdraw their deposits. And economists warned that the Russian economy could shrink by 5%.
The collapse in the currency prompted the Russian central back to implement emergency measures on Monday, including a huge hike in interest rates to 20% from 9.5%.
European markets opened lower, as the West continued to impose fresh sanctions on Russia. In early trade the United Kingdom’s FTSE 100 fell 1%, the German DAX 30 dropped 2% and France’s CAC 40 was 2% lower.
Asian markets ended the day on a mixed note. Hong Kong’s Hang Seng lost as much as 1.6%, before closing down 0.2%. Japan’s Nikkei 225 and Korea’s Kospi erased earlier losses and were up 0.2% and 0.8%, respectively. China’s Shanghai Composite was up 0.3%.
Global markets had been turbulent last week after Russian President Vladimir Putin launched an invasion of Ukraine, and the pain has spread beyond stocks.
The Russian ruble plummeted as much as 40% Monday against the US dollar, after Western countries announced new sanctions against Russia, including expelling certain Russian banks from SWIFT, the high-security network that connects thousands of financial institutions around the world.
Russia’s currency crashed to a record low against the US dollar Monday as the country’s financial system reeled from crushing sanctions imposed by Western countries in response to the invasion of Ukraine.
The ruble lost more than 30% of its value to trade at 109 to the dollar at 2.30 a.m. ET after earlier plummeting as much as 40%. The start of trading on the Russian stock market was delayed, and then canceled entirely, according to a statement from the country’s central bank.
The latest barrage of sanctions came Saturday, when the United States, the European Union, the United Kingdom and Canada said they would expel some Russian banks from SWIFT, a global financial messaging service, and “paralyze” the assets of Russia’s central bank.
President Vladimir Putin’s government has spent the last eight years preparing Russia for tough sanctions by building up a war chest of $630 billion in foreign currency reserves, but his “fortress” economy is now under unprecedented assault and at least some of that financial firepower is now frozen.
Russia continued to bear down on Ukraine’s largest cities over the weekend, but Russian fighters bore stiff resistance from Ukrainians. Peace talks are set to take place between delegates of the two nations Monday on the Ukrainian-Belarusian border.
Still, President Vladimir Putin ordered his country’s deterrence forces — including nuclear arms — be placed on high alert. That unnerved investors, concerned that the war could spill over to other countries outside of Ukraine.
Putin’s threat came after the White House and several EU nations announced the expulsion of certain Russian banks from the SWIFT banking system Saturday evening. Removing some Russian banks from SWIFT could effectively disconnect them from the international financial system, hindering their ability to do global business.
But that action could hurt European countries’ ability to buy Russian energy. Senior Russian lawmakers have said that shipments of oil, gas and metals to Europe would stop if the country’s financial system is removed from SWIFT. Russia remains a key exporter of oil and natural gas for much of Europe, and immediate alternatives that could blunt rising energy prices from a reduction of Russian exports aren’t obvious.
Some Western banks also have assets tied up in Russia, and cutting Russian banks off from SWIFT could sting.
The disruption to oil in particular is concerning to investors. Oil prices surged. Brent crude, the international benchmark, rose 4% to $101.80 a barrel. US crude rose 4.8% to $96 a barrel.
Moscow has tried to wean its oil-dependent economy off the dollar, limited government spending and stockpiled foreign currencies.
Putin’s economic planners have sought to boost domestic production of certain goods by blocking equivalent products from abroad. Moscow has meanwhile amassed a war chest of $630 billion in international reserves — a huge sum compared to most other countries.
David Lubin, a Citi economist and associate fellow at Chatham House, said “fortress economics” requires the creation of big foreign currency reserves that can be spent if sanctions bite.
“Russia has followed this pattern assiduously,” he wrote recently.
Some of those reserves are already being deployed. The Russian central bank said Thursday it was intervening in the currency markets to prop up the ruble. And on Friday, it said it was increasing the supply of bills to ATMs to meet increased demand for cash. Russian state news agency TASS reported that several banks had seen increased withdrawals since the invasion of Ukraine, notably of foreign currency.