Gas prices and petrol hit an all-time high and oil neared record levels on Monday after the US said it had discussed the prospect of an embargo on exports from Russia, before pushback from Germany eased the market tension.
The price of gas for delivery in the UK in April soared to 800p per therm at one point, up from 460p on Friday and 20 times the price of the same contract a year ago, before the autumn energy price crunch and war in Ukraine hit.
European benchmark gas prices jumped by 79% to as high as €345 per megawatt-hour, while Brent crude oil soared by more than 10% in early trading to $139 per barrel, a 14-year high and close to the all-time record of $147.50 set in July 2008.
Markets were responding to comments by the US secretary of state, Andrew Blinken, who referred to “very active discussions” with allies about escalating sanctions against the Kremlin by banning the import of Russian oil and natural gas.
As commodity prices surged, the average cost of a litre of petrol at UK forecourts reached a new record of 155.62p on Sunday, according to the data firm Experian Catalist, while diesel was also at an all-time high, at 161.28p.
Analysts at Bank of America said cutting off oil exports by Russia, the world’s second largest supplier at 5m barrels a day, could send oil shooting to $200 a barrel.
Prices only eased after Germany’s new chancellor, Olaf Scholz, appeared to pour cold water on the prospect of a coordinated transatlantic embargo on Russian oil and gas.
“Europe has deliberately exempted energy supplies from Russia from sanctions,” he said. “Supplying Europe with energy for heat generation, mobility, electricity supply and industry cannot be secured in any other way at the moment. It is therefore of essential importance for the provision of public services and the daily lives of our citizens.”
Boris Johnson lent support to Scholz, saying: “I think there are different dependencies in different countries, and we have to be mindful of that.”
The British prime minister told a press conference on Monday: “It is completely the right thing to do to move away from dependence on Russian hydrocarbons, but we have to do it step by step.”
Europe sources about 40% of gas imports and about 27% of oil imports from Russia, but Germany is more reliant than any other major economy on the continent on Kremlin-controlled supplies.
After Scholz spoke, the UK benchmark gas price dropped back from 800p per therm to 500p, still in record territory, while oil pared back some of its gains but was still up 4% at $123.
On the stock markets, the FTSE100 closed down 0.4% at 6959, while France’s Cac40 shed 1.3% and Germany’s Dax was the worst affected, ending the day just under 2% lower. Panic on trading floors sent safe havens sharply higher, with gold hitting as much as $2,000.86, its highest since mid-2020.
CHART OF THE DAY: The Brent crude oil market, since the launch of futures in June 1988 to today (nominal prices). The high today was $139.13 a barrel, still below the all-time high of $147.50 a barrel set in July 2008. #OOTT #Ukraine pic.twitter.com/VynyshFCt8
— Javier Blas (@JavierBlas) March 6, 2022
While Scholz’s comments calmed markets somewhat, the increasing seriousness with which a fossil fuel embargo is being discussed is set to keep commodity prices high.
The Bank of America chief economist Ethan Harris said cutting off most of Russia’s energy exports would be a “major shock to global markets”, and the loss of Russia’s 5m barrels could see oil prices double to $200 a barrel.
Rising commodity prices will only add to the global inflationary pulse, with US consumer price data this week expected to show annual growth at a stratospheric 7.9%, and the core measure at 6.4%.
It leaves a tough decision for the European Central Bank when it meets this week against a backdrop of a sharply falling euro. The nightmare scenario of stagflation – where inflation combines with stagnating growth – looms for the world economy.
“Given the potential for stagflation is very real, the ECB is likely to maintain maximum flexibility with its [quantitative easing] programme at €20bn through the second quarter and potentially beyond, thus effectively pushing out the timing of rate hikes,” said Tapas Strickland, an economist at NAB. “Higher inflation forecasts, though, mean rate hikes will be needed on the horizon.”
