Oil rises, stocks struggle as Russia-Ukraine tensions mount

LONDON: Oil prices pushed higher while stocks struggled on Wednesday after Ukraine called up reservists and Russia vowed a strong response to Western sanctions.

Traders had largely welcomed the sanctions as being less severe than feared, and mostly avoided Russian energy exports, sending oil prices sliding and stocks climbing.

But the stock gains largely evaporated and oil prices rose after Ukraine called up reservists and restricted movement in the country.

“This change of tone perfectly encapsulates the clear and present danger of headline risk with respect to market ebb and flow, as investors nervously eye Russia’s next move,” said Michael Hewson, chief market analyst at CMC Markets.

In Europe, London managed to eke out a marginal gain, while Paris finished 0.1 percent lower and Frankfurt shed 0.4 percent.

Wall Street’s three main indices were all lower in late morning trading, with the Dow shedding 0.4 percent.

Brent crude stood at $97.52 per barrel, up 0.7 percent from late on Tuesday, having soared to a seven-year high of $99.50 at one point on Tuesday on fears of disruptions to key Russian oil supplies.

Other commodities have also hit multi-year peaks on fears of all-out war.

Russian President Vladimir Putin has defied a first round of international sanctions to put his forces on stand-by to occupy two rebel-held areas of eastern Ukraine.

On Wednesday, the Russian foreign ministry said: “There should be no doubt — sanctions will meet a strong response…”

The Western sanctions include moves against Russian banks, cutting the country off from international financing by targeting Moscow’s sovereign debt, and penalising oligarchs and their families who are part of Putin’s inner circle.

US and allies including Britain have warned of further sanctions should Putin extend his country’s military grip beyond the two territories in the eastern Donbas region.

British Prime Minister Boris Johnson on Wednesday hosted a meeting of business leaders to discuss limiting Russian access to City financial services.

Johnson told the meeting that “if the crisis escalates, tougher sanctions will follow as part of ensuring President Putin’s destructive course of action in Ukraine is halted”, his spokesman said.

So far the sanctions were not as bad as markets had feared — crucially with none aimed at Russia’s crude exports — providing some much-needed breathing room for investors and halting the surge in oil prices that has seen both main contracts pile on more than 20 percent so far this year.

Germany has though halted certification of the Nord Stream 2 gas pipeline from Russia and on Wednesday, US President Joe Biden announced that Washington would do so too.

“While the first round of sanctions imposed on Russia by the West may have been mild, a Russian response and further Western sanctions will put further pressure on the global economy,” said Chris Beauchamp, chief market analyst at online trading platform IG.

‘Considerable risk’

“There’s still considerable risk that oil prices may surge above $100 a barrel” if the situation escalates, said Vivek Dhar at Commonwealth Bank of Australia.

“Oil markets are particularly vulnerable at the moment given that global oil stockpiles are at seven‑year lows.”

The crisis comes with investors preparing for a series of interest rate hikes by the US Federal Reserve as it tries to rein in 40-year-high inflation.

Commentators said that while a March hike is baked in, forecasts for further increases this year are being affected by events in Europe as officials try to assess the impact on the economy.

If energy prices jump further it could also force the hand of the ECB, which has moved slowly to wind down stimulus and hike rates.

Fawad Razaqzada at ThinkMarkets said “inflationary pressures might exacerbate in the near term and force the ECB to apply the brakes by tightening its policy faster.”