Dongwu Securities: Russia’s foreign war and oil prices peak is a historical coincidence or inevitable?

2022-05-01 0 By

Oil prices peak after Russia-Ukraine warThe question may seem out of place now, after all, since February 2022, as fears of a war between Russia and Ukraine have continued to mount, The brent has soared towards the $100 mark.As global oil supplies continue to lag strong demand growth, foreign institutions such as Bank of America and jpmorgan chase expect Brent prices to rise above $120 in the event of war.Yet for half a century, we did see the peak of oil prices every time Russia waged a military war against its neighbours.In terms of the history since 1970, Russia (the Soviet Union before 1991) launched a total of five large-scale wars. Except for the chechen war in the Russian Federation in 1994 and 1999, the remaining three wars against neighboring countries witnessed the peak of oil price in each big bull market (Figure 1).1979 Soviet Invasion of Afghanistan: From December 24 to 26, 1979, The Soviet Union assembled 80,000 troops on the Afghan border and launched the 10-year invasion of Afghanistan on December 27.The war was preceded by a surge in oil prices, from $12.66 in early 1978 to $40.75 in November 1979, an increase of 222 per cent. However, oil prices peaked in the month of the Soviet invasion of Afghanistan and retreated 69 per cent in the following year, although they have since recovered somewhat.2008 Russia-Georgia War: On Aug. 8, 2008, just as the Beijing Olympics were starting, Russia sent troops into South Ossetia and engaged Georgia directly.The war comes just after international oil prices hit a century high of $147.50 in July 2008.Although the war lasted only 10 days, it was in the same month of the war that international oil prices witnessed the biggest drop under the financial crisis.2014 Russian annexation of Crimea: On March 18, 2014, Russian forces infiltrated Crimea, combined with information cyberwarfare, and annexed it bloodless, shocking the Western world.Although the impact on international oil prices was limited during this period, brent oil price has been fluctuating above $100 since June 2013, but after the Crimea incident, international oil prices have become a spent force, and soon began to collapse under the price war of Opec.We do not think it is a coincidence that the above recovery indicates that international oil prices did peak around the time of Russia’s foreign war.First of all, as a major oil producer, the rise in oil prices has strengthened Russia’s national power, which is the basis for its decision to send troops abroad when oil prices are high.In 1979 and 2008, for example, Russia’s GDP grew by 13.8% and 8.5% respectively, the highs of each recovery.Secondly, as a major consumer of crude oil, rising oil prices aggravate inflation in western countries and easily trigger domestic dissatisfaction with the government, thus reducing external resistance for Russia to send troops.Take the US as an example. Before the 1979 and 2008 wars, domestic inflation (YEAR-ON-YEAR CPI) was 12.6% and 5.6% respectively. The high inflation hit consumer confidence in the US, while the approval rating of the then US President was at the low point of his presidency due to public dissatisfaction with government governance.But too much can do the opposite, as oil prices and high inflation erode consumer demand in the West and voters’ discontent at home forces democratic governments to put pressure on Opec.That is why each of these Russian wars has been followed by a dramatic liquidation of the oil market, either by a collapse in demand or a release of supply, although this has often been compounded by external events.Ukraine since 2022 has many parallels with history: Soaring oil prices have exacerbated high inflation in the US and Europe, and Biden’s approval ratings have hit record lows since taking office, along with falling consumer confidence.As a result, an external catalyst is increasingly needed to curb the rise in oil prices amid the untenable weight of high inflation, and we expect Russia’s war on Ukraine to once again witness the culmination of this rally.On a full-year basis, oil prices above $100 won’t last long.Risk warning: The spread of the epidemic exceeds expectations, and the effect of policy hedging against economic downturn is not as good as expected (source: Caiu)