The situation in Ukraine escalates! Oil and gas prices are likely to continue to rise Global inflationary pressures are intensifying

On February 24, the situation in Ukraine again escalated sharply, causing oil and gas prices to jump
.
The Russian Ministry of Defense said that all tasks of the Russian Federal Armed Forces on the 24th were completed, and 83 of Ukraine's ground military infrastructure were paralyzed
under the blow.
The Chernobyl nuclear power plant was controlled
by Russian forces.
The leaders of the Group of Seven (G7) agreed to advance "devastating" sanctions against Russia and "radically enforce" them, leaving Russia out of the SWIFT for the
time being.
Biden announced a rupture in U.
S.
-Russia relations, and the Pentagon ordered about 7,000 more troops
to Europe.

As Russia is the world's third-largest producer of crude oil and the most important supplier of natural gas to Europe, oil and gas prices jumped
.
Brent crude futures topped $100 a barrel in early trading on Thursday, the highest level
since 2014.
European gas prices also soared 41%
at one point.

Analysts believe that there is little way to lower oil and gas prices
globally after the escalation of the situation in Ukraine due to the limited ability of crude oil and gas producers to increase production.
Global inflationary pressures will also intensify, and global central bank monetary policy will face more uncertainty
.

Oil prices may climb to $125 a barrel in the second quarter of this year

The market expects global oil demand to return to pre-COVID-100 million b/d levels
in 2022.
But even before the escalation of the situation in Ukraine, oil supplies were already difficult to keep up
.

Christyan Malek, head of global energy strategy at JPMorgan, said global spare capacity, the additional production that can come online in a matter of weeks, has fallen to 2.
8 million b/d, compared with a historical average of 5 million b/d
for operational or geopolitical issues.
Therefore, even if the Ukraine crisis does not affect Russian oil exports, international oil prices will climb further
.

"Spare capacity is falling, and the (oil) market has to re-price this lack of margin of safety
.
" Molek expects Brent crude futures to rise to $125 a barrel in the second quarter of
this year.
"Oil prices are rising, oil supercycles are inevitable, and the market can't do anything about it
.
" He added
.

Bob McNally, head of Rapidan Energy Group, believes the risk of oil supply disruptions may be limited to oil and gas
passing through Ukraine.
Specifically, Ukraine produces about 250,000 barrels per day of crude oil, and gas supplies account for about 20%
of the gas that Russia carries to Europe.

"But given the lack of spare capacity in the oil and gas market, it doesn't matter
if there is a supply disruption or not.
" He said at an oil market discussion this week, "Until the market can fully determine that the supply of oil and gas will not be interrupted, I think the pressure on oil and gas to continue to rise will always be there
.
" ”

Some members of the OPEC Organization (OPEC) have struggled to restore pre-pandemic capacity
due to reduced investment in oil production due to spending cuts during the pandemic.
In fact, OPEC and oil producers, including Russia, have failed to meet production targets
since last July.
The United States has also repeatedly urged the OPEC, especially Saudi Arabia, to increase oil production efforts to ease oil prices and curb inflation
.
The latest U.
S.
sanctions also do not include restrictions on Russian crude oil supplies
.

OPEC+ will meet on March 2 to determine oil production in April
.
But as of Wednesday, representatives of some major member states still said that triple-digit oil prices would not allow them to increase production
faster.
Their current strategy is to add 400,000 bpd of supply
to the market every month.

McNally argues that "even if Saudi Arabia agrees to increase production, it is unclear whether this proposed action will be effective, as the increase will only further deplete spare capacity.
"

In addition to urging OPEC to increase production, the United States and some other global oil consumers have also released emergency oil inventories
since last year to stabilize oil prices.
Yesterday, US President Joe Biden said that he is working with major consumer countries to jointly release crude oil
from the strategic petroleum reserves.
To this end, at the end of the New York market on Thursday, oil prices gave back their previous gains, WTI crude oil futures closed below $93 / barrel, and Brent crude oil also fell back below $100
.

But EdMoya, Oanda's senior market analyst in the Americas, said that although futures prices narrowed their gains after Biden's speech on Thursday, the possibility of a sharp rise in oil prices remained
.
The pullback in crude oil prices after the announcement of this round of sanctions has not changed the possibility
of a sharp rise in oil prices in the future.

John Driscoll, chief strategist at energy services firm JTD Energy Services, also said there was already a lot of bullish sentiment on the fundamentals of the oil market, and the escalation of geopolitical risks in the past few days has materially further exacerbated the risk of
imbalances in commodity markets.
At this stage of the conflict, it is difficult to see an easy way to
de-escalate the situation.
Coupled with optimistic news about the progress of the Iranian nuclear negotiations, oil prices may continue to oscillate upwards
.

Natural gas prices will also continue to rise

Not only oil, but given that Europe relies on Russia for 40% of its gas supply, the escalation of the situation in Ukraine has catapulted the TTF benchmark Dutch gas futures price to more than 88 euros/MWh
.
Wholesale prices for natural gas in Europe have soared by more than
450% over the past year as demand for natural gas recovers and imports from Russia decrease.

Previously, Germany and the United States suspended approvals for the Nord Stream 2 pipeline as part of the sanctions, potentially delaying its commissioning until 2023
.
Analysts' baseline is that Russia will not cut off gas supplies to Europe, but may retaliate by reducing gas supplies, and in any case, gas prices will hardly avoid the risk premium around supply
disruptions.

IHS Markit analyst Laurent Ruseckas said Moscow is unlikely to respond to Western sanctions by cutting off gas supplies, which reach Europe
through pipelines in Ukraine, Poland and the Baltic Sea.
"Unless Russia or Ukraine intentionally sabotage, the probability of supply disruption caused by 'stray bullets' is low, and this will certainly not be the baseline scenario for our judgment"
.
Russian Energy Minister Nikolai Shulginov also said at an energy conference in Qatar on Tuesday that Russia's goal was to keep gas supplies "undisturbed.
"

But ING analyst Warren Patterson said: "In theory, this will not have any impact on gas supplies to Europe, because the pipeline is not yet operational, and there is spare pipeline capacity
to supply gas through other routes.
" However, Russia may further reduce the amount of gas it sends to Europe in retaliation for the suspension of the approval process
by Europe and the United States.
”

At the aforementioned energy conference, Qatar's energy minister, Saad al-Kaabi, noted that if there is an extreme situation in which Russia interrupts gas supply, Europe will find that no country can replace Russia in providing Europe's gas supply because, as with oil, there is not enough spare capacity in the market to fill this gap"
.

JPMorgan's commodity strategy team, led by Natasha Kaneva, also said in the research report that natural gas "cannot avoid the risk premium from supply disruptions, which may be reflected again in this geopolitical crisis
.
" The team noted that according to the EU and US statements, the possibility of Nord Stream 2 not being put into use in 2023 is increasing, "if this is the case, we expect the European gas market to be in a state of long-term competition with LNG, which will eventually manifest itself in a sustained increase
in prices.
" ”

Global inflationary pressures are hard to solve, and central banks are even harder

As oil and gas prices continue to rise, many analysts have begun to worry about the risk of
further higher inflation.

Analysts at Eurasia Group said in a note that the United States and Europe will almost certainly impose a far-reaching package of sanctions against Russia, and in the worst case, may exclude Russia from the SWIFT financial information system and put the Nord Stream 2 pipeline on hold
indefinitely.
Oil and gas prices will rise sharply, increasing global inflationary pressures and dragging down financial markets and global growth
.

According to Bloomberg's previous calculations, when international oil prices climb to $100/bbl, inflation in the United States and Europe will increase by about 0.
5 percentage points in the second half of the year
.
JPMorgan's forecast is that if international oil prices climb to $150/bbl, global inflation will soar above 7% and global economic expansion will be completely halted
.

For some time, central banks around the world, including the Federal Reserve, have made fighting inflation their primary policy goal
.
The dual risks of rising inflation and an uncertain economic outlook that accompany the escalation of the situation in Ukraine will undoubtedly bring greater uncertainty
to the monetary policy formulation of central banks around the world.

Robert Holzmann, a hawkish senior ECB official, has said that the Ukraine conflict may delay the ECB's plan to withdraw from stimulus policies, and the uncertainty associated with the Ukraine conflict has increased, and the ECB will carefully analyze the possible economic impact
of the crisis.
"It's clear that we're moving towards a normalization of monetary policy, but there's a chance that the pace will be delayed
now.
" He said
.

The Fed's resolute stance on tightening monetary policy remains unaffected for the time being, but it also said it is closely monitoring developments
in Ukraine.
Richmond Fed President Barkin said he would have to watch whether the situation in Ukraine would upend the Fed's stance
on monetary policy.
Atlanta Fed President Sportwick also said the Fed is closely following the Ukraine crisis to assess the possible economic impact of the situation
.
But he also noted that Fed monetary policy is destined to return to a more normal state
.
Cleveland Fed President Mester said geopolitical risks would increase inflation and growth risks to the U.
S.
in the near term, but it would still be appropriate for
the Fed to raise interest rates in March and then start a series of rate hikes.

Jim Paulsen, chief investment strategist at Leuthold Group, an independent investment research firm in the United States, believes that geopolitical events may not interfere too much with the Fed's thinking, and the path of rate hikes is still expected to proceed
along the set path.
Chua HakBin, a senior economist at Singapore's Maybank, said higher oil prices would increase pressure on central banks around the world to tighten their cycles early and raise interest rates more aggressively to curb inflation
.