Russia & Ukraine: All Eyes on Energy

February 15, 2022

Two charts showing inflation in the U.S. and Eurozone (left, column chart) and Natural Gas prices (right, line chart). Chart subtitle: Russia and Ukraine tensions add to energy price pressures, with inflation already at multi-decade highs. First chart description: Left y-axis shows YoY Inflation, ranging form 0% to 8%. X-axis shows four categories, labeled U.S. CPI (blue column), U.S. Core CPI (blue patterned column), Eurozone MUICP (orange), and Eurozone Core MUICP (orange patterned). Markers on each column show 5-year average. Note that U.S. Core CPI = CPI ex. Energy and Food; Eurozone Core MUICP = ex. Energy, Food, Alcohol, and Tobacco. U.S. CPI is at 7.5% with marker at 1.8%; U.S. Core CPI is at 6% with marker at 2%; Eurozone MUICP is at 5.1% with marker at 1% and Eurozone Core MUICP is at 2.3% with marker at 0.9%. An arrow highlights the difference between the two Eurozone columns. Second chart description: Y-axis shows $/MMBtu (Metric Million British Thermal Unit, standard unit of measurement for natural gas). X-axis shows months from February 2021 to February 2022 (data through Feb. 14). U.S. Natural Gas line is shown in light blue, and has hovered very low in comparison to the Dutch Natural Gas line in dark orange. As of February 14th, the Dutch measurement is at $91, while the U.S. is only at $4. Source: Bloomberg; Inflation data as of January 31, 2021; Energy prices as of February 14, 2022.

Escalating tensions between Russia and Ukraine have the world on edge. While the situation continues to evolve and the likelihood of a full-scale war remains unlikely, markets are attempting to price in the risk. This latest geopolitical clash builds on an already tumultuous start to the year for financial markets. In the U.S., the S&P 500 has fallen 8.1% from its all-time high on January 3rd amid concerns about rising inflation and consequential rate increases by the Fed. The latest year-over-year inflation figures for both the U.S. and Eurozone have reached alarming milestones, with the U.S. hitting a new 40-year high and the Eurozone setting a new record going back to 1991. Ballooning energy prices have been the greatest contributor to rising inflation, evident in the delta between consumer inflation and core inflation, which removes more volatile prices like energy- and food-related costs. The friction between Russia and Ukraine is only expected to worsen this dynamic, given Europe’s reliance on Russia for energy.

The European Union imports nearly 40% of its total natural gas consumption from Russia. While global oil prices tend to trade largely in tandem due to OPEC’s influence, natural gas prices are more sensitive to regional access and supply. The Dutch TTF Natural Gas price has historically hovered around $20/MMBtu but has surged more than 300% over the last 12 months, while U.S. Natural Gas is up just 36.9% over the same period. While geopolitical fears may continue to drive up the cost of crude as uncertainty builds, the more immediate impact is to the European energy markets via natural gas prices. In the most direct sense, the impact to global developed markets may be low, with the Energy sector comprising only 2.9% and 3.9% of the S&P 500 and MSCI EAFE indices, respectively, though knock-on effects may be broader, including economic sanctions and additional measures to combat inflation that could ultimately impact growth. Past geopolitical stress events provide little guidance with moving pieces always evolving. Tensions could deescalate and we could see little fallout, as was the case following the 2014 Crimean crisis, or pressures could mount with wide-reaching global implications. For now, we will continue to monitor and help our clients navigate the volatility.

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