by Patrick Fearon-Hernandez, CFA, and Thomas Wash
[Posted: 9:30 AM EST] | PDF
Good morning! Today’s report begins with a brief rundown of the latest updates on the war in Ukraine. We focus on how the war may impact climate change initiatives. Next, we look at the possibility that countries may offer to produce more oil, followed by a brief discussion of international and U.S. news. We conclude with a COVID-19 update.
After two weeks of fighting, Ukraine signaled it was open to a compromise. An aide to Ukrainian President Volodymyr Zelensky stated the country is willing to discuss Russia’s neutrality demand but would not concede any territory. However, another round of talks led to a stalemate in negotiations, as Russia is now demanding that Ukraine should also demilitarize. The two sides are expected to continue negotiations on Thursday in Turkey.
- The Ukraine conflict is starting to impact the global transition to greener energy. A surge in the price of nickel threatens to slow down the production of Electric Vehicles. Automakers rely on nickel for their batteries. The rally in nickel prices was caused by supply disruption concerns related to the war. On Wednesday, Indonesia stated it plans to add as much as 400,000 tons in output this year and possibly 500,000 tons in the following year. The increase in production from Indonesia may offset the loss from Russia; however, there are still concerns that automakers could face a deficit. Thus, automakers are likely to struggle to make a quick switch away from making cars with internal combustion engines to producing cars with electric motor engines.
- Additionally, the surge in oil prices has led to a rethink in climate change initiatives. The United Kingdom is considering lifting a ban on fracking as it looks to become less dependent on foreign energy sources. Meanwhile, U.S. calls for increased oil production were rebuffed by shale producers complaining of a lack of access to capital and labor. Although government officials expressed a willingness to work with firms to increase their drilling capacity, energy companies state they are still constrained by investors who favor profitability over drill expansion.
- As a result of production limitations, countries are starting to make uncomfortable ties with their adversaries as they seek to become less reliant on foreign oil while still maintaining climate goals. Weeks after considering a potential import ban on Chinese solar panels, the EU has decided to ramp up its solar and wind installation by importing more renewable technology from China. Meanwhile, the U.S. is creating warmer ties with former foes Venezuela and Iran as it seeks additional resources for oil to offset the Russian shortfall. As the war in Ukraine continues, we expect there may be a possible rethink of specific global ESG standards as companies and investors grapple with deteriorating market conditions. Relaxing some of these standards could create more favorable investing conditions.
- The Iran nuclear deal ran into a new obstacle on Wednesday. Russia has demanded additional concessions before it can reach an agreement. A representative from Iran seemed to dismiss those demands by stating that Iran would not be deterred by “outside factors” from signing a new deal. However, Russia’s designated role in taking delivery of Iran’s uranium stockpiles could potentially delay an agreement from being signed. If the Iran nuclear deal gets signed, it is estimated that they could add up to 2 million more barrels a day of oil.
- Conflicting messages from OPEC member United Arab Emirates about oil production caused oil prices to whipsaw. On Wednesday, oil prices fell as much as 17% after UAE said it would call on OPEC+ members to boost production. However, hours after making that statement an official from the UAE walked back the comment by reaffirming the country is still committed to the OPEC agreement and its existing monthly production quota. The new statement led to a slight recovery in oil prices.
- As the war rages on, the U.S. is putting more pressure on the Russian economy. The House passed a bill that would ban the import of Russian oil. The Biden administration is also considering imposing sanctions on Russia’s state-owned atomic energy company, Rosatom. In response to the sanctions, Russian Prime Minister Mikhail Mishustin stated Russia would start to reconsider its energy-supply commitments. He also hinted the country would begin prioritizing its wheat supply needs. Because Russia is the world’s largest supplier of wheat, withholding its wheat exports could lead to a rise in global food prices.
- In South Korea, Yoon Suk-yeol, a conservative candidate, won the presidential election. The win suggests that the country’s foreign policy will become more hawkish toward China and North Korea and friendlier to the U.S. His government will also push for economic growth driven by the private sector.
- The European Central Bank plans to end its quantitative easing program in the third quarter of 2022, one quarter ahead of schedule. The announcement caught investors off guard, as many were expecting the central bank to take a modest approach to QE in response to the war in Ukraine. The hawkish shift by the ECB indicates it is concerned about the rise of inflation throughout the bloc.
- On Thursday, the House passed a $1.5 trillion spending bill. It will fund the government throughout the fiscal year, provide Ukraine with $13.6 billion in aid, and help transition debt contracts from LIBOR. The bill was forced to drop COVID-19 aid after opposition from Democrats. It is expected to be taken up by the Senate on Friday.
COVID-19: The number of reported cases is 451,091,296, with 6,021,649 fatalities. In the U.S., there are 79,406,687 confirmed cases with 963,820 deaths. For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics. The CDC reports that 691,748,065 doses of the vaccine have been distributed, with 554,168,735 doses injected. The number receiving at least one dose is 254,299,172, while the number of second doses is 216,355,844, and the number of the third dose, granting the highest level of immunity, is 95,499,589. The FT has a page on global vaccine distribution.
- COVID-19 cases in Singapore are starting to decelerate. It suggests the ongoing Omicron wave throughout Asia may also be close to reaching a peak.