Oil prices will stay above $100 a barrel as long as the war in Ukraine rages

The most serious effect of the Russian-Ukrainian war on the world economy will be the rise in commodity prices. Oil prices will stay above $100 a barrel as long as the conflict rages, the EIU said in its global outlook report.

The threat of sanctions on Russian hydrocarbon exports and uncertainty surrounding supplies will exacerbate existing tensions in the market. Gas prices in Europe will rise 65% this year, after quintupling last year. Europe has limited gas stocks and the gas supply for the 2022/23 winter season in the northern hemisphere is causing concern. Europe is reducing its demand for Russian gas, which will reduce Russian production and put additional pressure on supplies, said Agathe Demarais, director of global forecasts, EIU.

“We expect rising commodity prices to fuel global inflation, which will hit 7.7% this year, a 26-year high,” the EIU said.

Despite concerns about the impact of the Russian-Ukrainian conflict on their economies, the major central banks are stepping up their efforts to control inflation. We expect the Federal Reserve (Fed, the US central bank) to now raise rates by 225 basis points in 2022 and also begin a balance sheet run-off. The European Central Bank will now pause its quantitative easing program at the end of June 2022, according to the report.

Russia is also a major producer of several base metals, including aluminum, titanium, palladium and nickel. After spikes in all these markets last year, prices will remain at high levels as long as the conflict continues. This will have a substantial impact on industrial sectors (such as the automotive industry) across the world, but especially in Europe. The prices of agricultural raw materials (wheat, corn, barley and rapeseed) will soar. Ukraine and Russia together account for more than a quarter of the world’s wheat trade and produce 12% of the calories consumed worldwide.

The conflict between Russia and Ukraine is affecting the global economy through financial sanctions, rising commodity prices and supply chain disruptions. Together, these transmission channels cause inflation to spike and growth to slow sharply, especially in Europe. This situation will continue for the rest of the year, as we expect the war to last until at least the end of 2022, the EIU said.

The West has imposed sanctions on Russia, with the aim of crippling the economy; “we now expect them to remain in place for the entire forecast period (2022-26). The most damaging sanctions are those aimed at the Central Bank of Russia (CBR), as they prevent the CBR from access about half of the US$643 billion it holds in foreign exchange reserves by blocking its ability to convert assets held in US dollars and euros into rubles.They also limit Russia’s ability to service its external debt. We expect Russia to default on its sovereign foreign currency debt, but don’t expect that to lead to a global financial crisis,” The Economist Intelligence Unit (EIU) said.

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