The stock market in the United States seemed to be recovering after the first shock of military conflict between Russia and Ukraine. But this week sanctions against Russia are on the front page as U.S. President Joe Biden announced the ban on Russia’s oil imports that will begin this April. This is the ultimate devastating economic weapon against Russia that will also hit the American economy.
The United States imports 8% oil liquid fuel from Russia. Such harsh restrictions will certainly push energy prices up along with the inflation in the United States. The United Kingdom followed in America’s footsteps by announcing a gradual oil import ban from Russia by the end of 2022. The Commonwealth oil and oil products that are imported from Russia stand at 8% of demand. Brits have also refused to ban gas imports from Russia.
The U.K may be looking at an inflation rate of up to 8.5-9.0% in the second quarter of 2022 after this decision, while GDP may slow down to 1.9% from 4.2% forecasted before. Real incomes may deteriorate by 4.8%, which is the highest drop in the last 67 years.
The market is now expecting the European Union to make the next move and join in the energy ban of Russia. However, the EU is much more dependent on oil and gas supplies from Russia as oil imports accounts for 30% of the total and gas imports are at 40% of the overall demand. These numbers are critical. But European policymakers seem to forget their own economic interests amid fears of Russian aggression. Even Serbia, a true historical ally of Russia, is now ready to join the European oil ban if it is imposed. “Unfortunately, I would like to say that I expect the situation to calm down. It is important for us to analyze the events. There have been terrible disturbances that will affect Serbia as well. Joe Biden has banned the import of oil. There are 3.4 percent of Russian oil on the American market. We expect an EU decision tomorrow," Serbia’s President Aleksandar Vucic said on Tuesday. So far Serbia has not put any sanctions on Russia, but it has banned imports of wheat, corn, flour and cooking oil to counter price increases. Serbia is a candidate to join the EU, but such words from Mr. Vucic may mean some restrictions on oil imports from Russia are likely to be imposed on the European level.
The consequences of such a decision could be catastrophic not only for the EU, but for the entire global economy as it may prompt Brent crude to soar to $160.00-180.00 per barrel and bring forward an inflation tsunami just like in 2008. Even if the U.S. succeeds in significantly increasing oil pumping in Venezuela, Iran, Saudi Arabia, and United Arab Emirates this would not improve the overall economic situation. Major central banks have no other choice but to hike interest rates sharply to tackle blistering inflation. That would force economies to slide into a recession and provoke stock markets to crash.
This week investors will be anxious to see February inflation data from the United States and also the statement of the European Central Bank (ECB) after its meeting on Thursday. Both are important for the market, but the levels of the oil bank are far more significant. This issue will certainly impact prices and ECB’s moves.
The technical picture for the S&P 500 broad market index has changed dramatically after the index fell on Monday. Aggressive sell positions from 4310-4330 points with the target at 3950-4050 points could be considered.
The oil market is preparing for the exponential growth to the ultimate target of $160.00-180.00 per barrel of Brent crude. The rally might be stopped at the resistance level of $132 per barrel, but it is likely to resume once the EU announces some kind of oil imports ban from Russia.
Gold has strongly reacted to the oil ban on Russia by the U.S. and the U.K. as prices peaked $2060-2070 per troy ounce. Technically we may expect a turnaround of gold prices with the downside target at $1840 per ounce, or even $1750-1760. However, in case of further developments, geopolitical factors may keep gold prices at record highs.
EURUSD reached its downside targets and is trying to bounce back towards 1.12000-1.13000. This scenario is highly likely. So, in case of a downslide to 1.08900-1.09200, some long positions with the target at 1.10000-1.10500 by the end of this week could be considered.
GBPUSD is on the downside track. If the pair succeeds to rise to 1.31900-1.32000 it could be a signal for an upside correction. Only some small aggressive long positions could be considered at 1.31200-1.31400 with the target at 1.32100-1.32300.