There is widespread concern that global inflation has evolved from a phased issue to a long-term one
Consumers are paying the price for inflation. The picture shows Americans in a dessert store with a sharp price increase. Photo/ Caijing reporter Jin Yan
Wen | Special Correspondent of Caijing Jin Yan from Washington
Edit | Su Qi
The world faces one of the worst geopolitical crises since the end of the Cold War, which has also cast a huge shadow on the global economy. Economic sanctions led by Europe and the United States are rapidly causing an avalanche of the Russian economy. European stocks have fallen into a technical correction range, metal prices continue to soar, global supply has been severely squeezed, the global energy market has been completely in chaos, and the US market has been violently shaken. Geopolitical damage is triggering multiple crises.
The energy panic escalates
At the beginning of March, after the United States and its allies imposed sanctions on Russia on the Russo-Ukrainian war, the price of major U.S. oil rose above $110 a barrel for the first time in more than a decade. During the unconventional trading session on the evening of March 6, local time in the United States, WTI crude oil in New York and Brent crude oil futures in London opened sharply, and the price of crude oil once exceeded $130 per barrel. Brent crude oil rose as much as $20 per barrel to $138.02 per barrel. Oil traders said concerns about russia's limited energy flows sparked a rush to buy crude, pushing prices up 25 percent.
At a gas station in Maryland, customers refueling cars are calculating the cost of high oil prices. Photo/ Caijing reporter Jin Yan
Crude oil prices have only hit the $100/barrel mark twice in history, in March 2008 and February 2011, the first time the price of crude oil went straight up, and the second time it stayed above $100 for nearly three and a half years. International oil prices soared to a 14-year high, driven by the news that the United States is working with European allies to study the possibility of banning the import of Russian oil.
Russia is the second largest exporter of crude oil, exporting 4 million to 5 million barrels of crude oil per day, second only to Saudi Arabia. According to the U.S. Energy Information Administration (EIA), Russian oil accounted for only about 3 percent of all crude oil imports that arrived in the U.S. last year. According to intelligence firm Kpler, U.S. imports of crude oil from Russia in 2022 have fallen to their lowest levels since 2017. According to EIA data, the Average U.S. imports more than 20.4 million barrels of crude oil and refined oil from Russia every month, accounting for about 8 percent of U.S. liquid fuel imports.
Andy Hecht, a well-known wall Street investor, told Caijing that crude oil prices continue to hit new highs, and it is not surprising if oil prices rise to $200 a barrel. Oil prices can refer to the continuous sharp rise in international coal prices, and now the international benchmark coal prices are more than 400 US dollars / ton. Most market participants are likely to see crude oil as the world's most political commodity. While countries are encouraging alternative crude oil and renewable fuels to combat climate change, fossil fuels will remain the largest source of power. Switching to alternative fuels will take decades.
Newcastle-based NEWC thermal coal prices were quoted at $446/mt on March 2, soaring $140.55 in a single day, compared with just $238/mt on Feb. 25. In just three trading sessions, the gain reached 87%. Global commodity prices have risen dramatically over the past week, with the S&P Commodity Index rising 37 percent during the year and the Bloomberg Commodity Index nearing its biggest weekly gain since 1960.
Bullish mania is sweeping the oil market. According to the U.S. Commodity Futures Commission (CFTC), speculators' net long positions in Brent and WTI crude oil increased by 31,096 lots to 531,580 contracts in the week of March 1.
Frederic Neumann, an economist at HSBC, told Caijing that a surge in energy prices is bound to push up overall inflation faster, which will exceed many people's expectations. At the same time, with the labor market rapidly tightening, it seems that the Fed will still raise interest rates rapidly and continuously. The Chinese government has set an economic growth target of around 5.5 percent this year, an ambitious growth target, and a more aggressive easing policy towards its growth target could amplify pressure on global commodity prices.
On March 7, the Information Office of the State Council held a press conference, and Lian Weiliang, deputy director of the National Development and Reform Commission, said that the recent escalation of the Conflict between Russia and Ukraine has had an impact on the global energy market, and international crude oil and natural gas prices have further risen. Due to the high proportion of China's crude oil and natural gas extraction, it will be affected, and the cost of imports will objectively rise. But overall the impact is manageable. This is because, on the one hand, China is a big energy consumer and a big energy producer, so the energy supply is generally guaranteed.
Prices are only going to get higher
The United States is still in a general inflationary environment. As the epidemic eases and the demand from the economic recovery continues to be strong. Market panic caused by the recent Russian-Ukrainian conflict has led to higher prices in oil and gas, metals, agricultural products and consumer goods.
The U.S. Consumer Price Index (CPI), driven by energy prices, rose 7.5 percent year-on-year in January, a nearly 40-year high. Jeffrey Young, a former head of global foreign exchange at Citigroup and co-founder and CEO of DeepMacro, told Caijing that inflation would only get higher. The prices of energy, food and many other commodities are rising, including prices for services that are not affected by supply chains or wars. The price of many agricultural products is very high. All of this not only raises inflation levels in the United States, but may also create instability in some emerging markets.
US President Joe Biden recently delivered his first official State of the Union address since taking office, and inflation has become a pivotal issue. Some analysts predict that the CPI growth rate in the United States in February may sprint to 8%. According to the national average gasoline price monitoring report released by the American Automobile Association on the 6th, the average price of ordinary gasoline in the United States is currently 4.009 US dollars per gallon, of which california, Illinois, New York, Pennsylvania and Hawaii and other places have the highest oil prices, between 4.18 US dollars and 5.29 US dollars, the data set the highest average price of gasoline since June 2008.
Shipping companies are shunning Russian ports in favor of previously less-used Eurasian rail lines, through which much of the black sea is impossible to navigate. Lease prices for mega tankers on the Persian Gulf-Asia route are up 83 percent from a week ago as global buyers are hoarding crude at all costs to prevent Russian exports from drying up. In addition, many air cargo routes are required to be banned from Russian airspace, which has increased the cost of freight and the price of goods transmitted to consumers. The escalation of already strained supply chain pressures and the inability of supply to meet the rapid recovery of demand have made supply and demand more unbalanced, further pushing up inflation.
The U.S. labor market continued to recover, with private non-farm payrolls increasing by 678,000 in February and unemployment at 3.8 percent, but wage growth was inexplicably weak, rising 0.0 percent month-on-month and 5.1 percent year-over-year (0.7 percent and 5.7 percent, respectively, in January). Jeffrey Young warned that recently, the impact of strong data (non-farm payrolls and unemployment rates) has outweighed the impact of weak data (wage growth). But if the weakness in wage growth is not an accident, then it is an early signal that wage growth will not catch up with inflation, which will lead to a slowdown in medium-term economic growth. The Fed still needs to raise interest rates or risk repeating the mistakes of the 1970s: Supply-side pressures are pouring in, turning into demand-side inflation without raising rates.
Because Russia is a major supplier of metals for aluminum cans, aircraft and construction, and one of the world's largest suppliers of potash and nitrogen fertilizers, western sanctions against Russia will also lead to higher costs of machinery manufacturing and agricultural products in the short term.
A number of Wall Street sources pointed out to the Caijing reporter that the most worrying result is that the geopolitical crisis has evolved US inflation from a phased problem to a long-term problem.
A food crisis looming?
Known as the "granary of Europe", Ukraine is a large exporter of corn and wheat, according to industry estimates, Ukraine previously exported five or six million tons of cereals per month, of which about 4.5 million tons of corn and 1 million tons of wheat; and Russia is also a global wheat exporter. Russia and Ukraine account for nearly 20 percent of global wheat and corn production. Jolie Marshall, a spokeswoman for the United Nations World Food Programme, warned that disruptions in the supply chains of Russia and Ukraine would jeopardize the food security of millions of people around the world.
Long before the geopolitical crisis and subsequent sanctions led to the disruption of Black Sea wheat supplies, there was already a supply shortage of wheat worldwide as inventories in major exporters fell. According to the International Cereal Council (IGC), wheat ending stocks at the end of 2021/2022 is expected to be 57 million tonnes in the european union, Russia, the United States, Canada, Ukraine, Argentina, Australia and Kazakhstan, the world's major wheat exporters.
By the morning of February 24, global wheat and corn prices had soared. Sarah Menck, CEO of Gro Intelligence, believes that a number of important areas, including wheat, corn, vegetable oils, biofuels and fertilizers, may be in a "very, very difficult period" due to the Russian-Ukrainian conflict. In many parts of the world, some flour millers and food processors have inevitably been affected, and consumers have to pay more for food.
The escalation in Ukraine has pushed wheat prices to a nearly 14-year high. Hecht noted that in addition to supply and demand fundamentals and wheat's unique political history, wheat prices will be higher until the first seeds are sown for the 2022 crop. As technical factors and fundamentals are creating an almost perfect bullish storm, wheat prices are likely to rise sharply in the coming weeks and months.
Li Shanquan, senior fund manager of the Investment Management Company Invesco Fund of the United States, pointed out that the war between the two resource powers, coupled with the sanctions imposed by the United States and Europe on Russia, has caused crude oil prices to hit a record high and the prices of major metals have also soared. In fact, the worst may be agriculture. Russia and Ukraine are the world's largest wheat exporters. Wheat prices have risen 68 percent this year. But the worst may not yet come. In the case of oil and gas prices are not very high, fertilizer prices have risen for several consecutive years, oil and gas as the main cost of fertilizer, its high price will inevitably make fertilizer prices rise. With less fertilizer and less sown area, yield reduction is a foregone conclusion. That said, wheat prices in the coming year may be higher than they are now. This year's world's rice bowl does not look good!
Li Shanquan told the Caijing reporter that sanctions are always the relationship between force and reaction. Europe and the United States expect to make Russia bear serious consequences through sanctions, but the consequences of high oil prices for the West are not serious, and the final thing is to see who can survive.