A Russian invasion of Ukraine could further disrupt supplies of crude, potentially leading prices that are already their highest in seven years and approaching $100 a barrel, to even loftier levels.
“The conflict between Russia and Ukraine is likely to push crude oil prices above $100 a barrel sooner than earlier projected,” said Naeem Aslam, chief market analyst with AvaTrade, in a report Monday. “The potential jump in oil prices depends on what sort of sanctions the United States of America and its allies are likely to impose on Russia if it actually invades its neighbor.”
A spike in energy prices could hurt consumers and also prompt the Federal Reserve and other central banks to move more quickly to raise interest rates to try and tamp down inflation. That would probably be bad news for stocks as well.
Capital Economics analysts wrote in a report Monday that “a Russian invasion of Ukraine or severe ratcheting up of sanctions” could add as much as 2 percentage points to inflation in developed markets…”particularly in Europe.”
“Given the inflationary backdrop and hawkish signals from central banks, monetary policy could be tightened more aggressively as a result,” the Capital Economics analysts added.
Market may ignore some scary headlines, but not when oil’s involved
That’s one of the main reasons the market probably wouldn’t shrug off a conflict in Ukraine, even though it quickly dismissed many other skirmishes and terrorist attacks during the past century.
CFRA Research chief investment strategist Sam Stovall analyzed the market reaction to 24 military and terrorist events since World War II.
Stovall found that the S&P 500 typically fell only about 1% on initial news of a military event or terror attack and just 5.5% over the length of a particular event. And it only took, on average, 52 days for stocks to recover their losses.
“The equity markets are more at risk from the fallout from the war on inflation than on a potential invasion of Ukraine,” Stovall wrote. “History reminds investors that surprise military and terrorist activities have traditionally been short-lived and represented an attractive buying opportunity.”
Many of these events did not have a broader economic spillover, such as the assassination of President Kennedy, the massacre of Israeli athletes at the Munich Olympics in 1972, the Madrid bombing of 2004, London terrorist attack in 2005 and the Boston Marathon bombing in 2013.
But another major military conflict on Stovall’s list did impact the oil market: the 1990 war following the invasion of Kuwait by Saddam Hussein’s Iraq. And that led to a much greater market shock.
The S&P 500 plunged nearly 17% during the start of the Persian Gulf War, and it took more than half a year (189 days) for the market to recoup its losses.
It seems likely that a drawn-out conflict in Ukraine would be more problematic to the global markets and economy — much more like the Kuwait invasion than one-off terrorist events. Others worry about the fact that Russia is not just a significant player in the energy market.
“Given that Russia is a major oil and grain supplier and is a key producer of palladium, used in catalytic converters, fears of price rises are very real,” said Fiona Cincotta, senior financial markets analyst at City Index, in a report Monday.
The last thing that consumers (or investors) need is for more inflation pressure to push the costs of goods even higher.
