Estimated reading time: 2 minutes
Global tensions are running high following Ukraine being invaded by Russia.
Adding to this, financial markets have been roiled in recent days by the escalating crisis in Ukraine, pushing up the Brent crude oil price to US$97/bbl on Wednesday, 23 February 2022, and Thursday, 24 February 2022, to US$102/bbl, with the potential for further escalation.
For South Africa, which imports oil instead of exploring and extracting its own, higher oil prices would push up inflation substantially.
Chief Economist at Investec, Annabel Bishop, says, “The petrol price, already at R20/litre, could jump to R25/litre in the near term. A R1.26/litre increase is building for March — a figure that would be would be significantly higher were it not for some rand strength earlier in the month.”
Bishop explains that South Africa’s trade surplus, currency and government finances have all benefited from the strong export value of commodity prices in the past 18 months.
“SA is a key commodity exporter (chiefly of metals, minerals and agricultural products), but an escalation in hostilities in Eastern Europe could see commodity prices falling as markets anticipate lower economic growth,” she says.
OPEC+, however, keeps its oil prices high by quota controls and has already demonstrated supply shortage this year, bolstering the oil price above US$80/bbl even before the conflict erupted.
Delving deeper into the matter, Bishop highlights, “Russia is a key oil and gas exporter, and there may be little coincidence in the timing of hostilities, with the Ukraine now in the depths of the Northern Hemisphere winter and Europe heavily reliant on oil, coal and gas.”
The increased likelihood of war forewarns further supply shortages in an already tight market. Precious metals have gained significantly on safe-haven flows, but some other (non-energy or precious metal) commodity prices have dropped.
On a further note, Bishop says, “The futures market for commodities has been running very high this year, especially contracts for immediate delivery. But further escalation in military conflict, particularly one which draws in other countries in region and beyond, is likely to yield a slump, leading commodity prices lower.”
Russia is expected to push its objectives and persist with its aggressions, but these could wax and wane on interactions with the US/UK and others involved in attempting a peaceful resolution.
What are your thoughts on the matter? Share your views in the comment section below.