- Brent oil could rise to $150 if a supply shock materializes from Russian-Ukrainian tensions, JPMorgan said Friday.
- A push to $150 a barrel would be a 100% jump from the average price of $75 in Q4 2021.
- For weeks, Russia has been gathering thousands of troops on the Ukrainian border.
International oil prices could soar to $150 a barrel in the first quarter of 2022 if an ongoing dispute between Russia and Ukraine leads to a supply shock, JPMorgan economists said Friday.
The projection came as Brent oil so far this year has jumped around 12%, trading at nearly seven-year highs as strong demand for the commodity outstrips global supply. In Friday’s session, Brent reached nearly $88 a barrel.
“The latest geopolitical tensions between Russia and Ukraine raise the risk of a significant spike this quarter,” JPMorgan economists Joseph Lupton and Bruce Kasman wrote in a research note. “The fact that this comes on the back of already high inflation – hitting a multi-decade high in the last quarter – and a global economy that is reeling from a new wave of the COVID-19 pandemic adds to the fragility term of what is otherwise a fundamentally strong recovery.”
For weeks, Russia has amassed thousands of troops and artillery on the Ukrainian border. Ukraine and the United States have warned of an imminent invasion, but Russia has repeatedly asserted that it is not planning an invasion.
An unfavorable geopolitical event between Russia and Ukraine would significantly disrupt oil supply, with JPMorgan’s scenario looking at a “rapid” 100% rise in Brent oil over one to two quarters to $150 a barrel over the average price of $75 a barrel following a supply shock. The bank estimated that such a jump would require a “hard” cut of 2.3 million barrels per day in oil production, or about a 2% drop in total global supply.
“Given that this would only be a negative supply shock, the impact on output is to reduce global GDP by 1.6%,” based on JPMorgan’s general equilibrium model, and global inflation could reach a rate of 7.2% in the first half of 2022 from 3%, among other estimates.
There are two other channels through which a supply shock could hurt global growth, the investment bank said. The first stems from the repercussions of a Russian intervention in Ukraine.
“The United States, in coordination with its allies, would likely impose sanctions on Russia. While the possibilities vary widely, they are likely to negatively impact sentiment and global financial conditions.”
Second, JPMorgan said its estimates incorporate the “actual behavior” of major central banks over the past two decades, where oil price shocks related to geopolitical unrest have been seen as a greater threat to economic growth than the ‘inflation.
“In the context of a year of already high inflation and extremely accommodative policies, central banks may be less patient than usual, especially in [emerging markets], where rising global risk aversion may also put downward pressure on currency values.”