Impact of Russia-Ukraine on crude and Forex

Impact of Russia/Ukraine war on crude and Forex

The impact of the Russia-Ukraine war on crude and Forex markets has been minimal to enormous. In this article, we’ll attempt to look at the impacts this conflict has created on crude and Forex markets.

Impact of the Conflict on Crude Oil

Impact of Russia-Ukraine on crude and Forex

  • On 24 February 2022 Russia launched a military invasion on Ukraine.
  • Already inflated oil prices have since skyrocketed to over $110 per barrel.
  • An expert discusses the impact on energy prices and the energy transition.

In late February, when oil prices were approaching $100, Maciej Kolaczkowski, Manager Oil and Gas Industry from the World Economic Forum’s Energy, Materials, Infrastructure Platform, explained the impacts on inflation and the key factors determining oil prices, how prices affect the global economy and the implications for the energy transition. He said that “no one had a crystal ball” and indeed one week later Russia started a war in Ukraine.

Here, we look into insights on how this has changed the dynamic on the energy market, what we might see in terms of the impact on consumer energy prices and how the energy transition fits into this changed context.

Impact of war

What has been the impact on oil prices of Russia invading Ukraine?

Prices of oil and gas increased sharply. Both major oil benchmarks are trading today at above $110. Thus represents further 15% increase over last week of February 2022.

Currently, energy exports are not subject to sanctions on Russia. Europe is seeking alternatives, with reports suggesting that refiners should avoid taking Russian oil supplies. At the same time Russia is still able to find a market for the majority of its production by offering discounts in the order of $15-20.

Impact of Russia-Ukraine on crude and Forex

Clearly, the war continues to increase pressure in the system. Some analysts say that the risk of disruption to supplies has not yet been fully priced in and we may be poised for further run upwards.

On other hand, OECD countries are releasing 60 million barrels of oil – an equivalent of 12 days of Russian exports – from their strategic reserves to the market. The move is aimed to ease the price pressure, however as history shows such actions have only short-lived and limited impact on prices. What is released today will need to be replenished in the near future.

US ban on Russian oil imports

Strong economic recovery coupled with low investment in oil production were hugely exacerbated by the Russian invasion of Ukraine. This sent the oil price to stratospheric levels and this is being passed over to consumers at the pump.

Another option could include releasing more from strategic reserves to the market. However as recent and previous actions show, this would have only short-lived and limited impact on prices. What is released today will need to be replenished in the near future.

Rising energy prices

How will this impact consumer energy prices?

Again, it is hard to predict which way the situation and markets will go, however it seems that we are poised for a period of high energy prices that are driven by war and combined with tight market fundamentals.

High prices are being passed over to consumers at the pump, in their gas, heating and electricity bills. And high energy prices contribute to increased cost of virtually all goods and services further fueling inflation expectations.

Impact on Forex Markets

Impact of Russia/Ukraine war on Forex markets

Despite measures taken by US, the UK, the EU, Japan, Taiwan, Australia and New Zealand against Russia, Moscow continued to invade Ukrainian cities. The United States’ move to ban imports of oil and other energy products from Russia sent crude oil surging to close to $140 a barrel — the highest since the Global Financial Crisis of 2008.

The impact of the Ukraine crisis will be majorly seen over currencies that have major exposure to Russia and Ukraine, or of countries levying sanctions on Russian goods. We could see a major impact on the euro and the pound sterling. The dollar, being a safe haven currency, could remain on the bid side.

EUR-USD outlook

Russia accounts for almost 25 percent of the EU’s oil imports and 40 percent of its gas imports. Inflation in the euro zone hit an all-time high in February. Higher energy prices pose smaller a threat to the US than to the euro zone. Stocks in Europe have entered a bear market, with the DAX, CAC and Stoxx 50 indices down more than 20 percent from recent highs.

The European Central Bank has sped up an exit from its pandemic-era stimulus program amid rising prices and sluggish growth.

Moreover, steady rate hikes by the Fed and a dollar buoyed by risk-off sentiment will not allow the euro to outperform.

Technical setup

The EUR-USD is on the verge of breaking a 22-year trend-line. If it convincingly trades below 1.0850, we can see it tumbling further towards 1.0650 and 1.0350 levels. On the higher side, 1.1100 will act as crucial resistance.

GBP-USD outlook

Another currency that could be affected the most is the pound, which fell to the lowest since December 2020 recently. The UK doesn’t depend much on Russia for oil and gas. Though half of the gas piped into the UK comes from the North Sea and a third from Norway. Russian imports make up for less than five percent.
The recent spike in gas prices is set to trigger another big wave in the inflation reading this spring. Despite the central bank’s efforts, inflation is not cooling off.
The next Bank of England meeting is scheduled on March 17, when a hike of 25 basis points is widely expected, which may not be enough to lower prices.
Accelerating inflation, a gloomy growth outlook and rising benchmark rates could hurt the UK economy, pulling the GBP-USD below 1.28.

Technical setup

The pair has breached its crucial support of 1.3170 (38.2 percent retracement). The lower lows could take it further towards 1.2850 in the near term and 1.2500 over the medium term. On the contrary, crucial resistance to watch is expected at levels of 1.3370 and 1.3450 which are unlikely to be crossed.

Overall outlook

The Russia-Ukraine war has added to pressure on the already soaring prices in both Europe and the UK. Uncertainty in the past fortnight or so has changed everything. It will be really uneasy for both the regions to gauge the economic outlook.

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Disclaimer: All investments and trading in the stock market involve risk and is a personal decision. This article “Impact of Russia-Ukraine on crude and Forex” is not a trading advice or instruction from Instaforex Nigeria but meant to create awareness about Forex trading.

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