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- Brent oil could soar to $150 if a supply shock materializes from Russia-Ukraine tensions, JPMorgan said Friday.
- A surge to $150 a barrel would be a 100% jump from the $75 average price in Q4 2021.
- Russia for weeks has been amassing thousands of troops at Ukraine's border.
International oil prices could soar to $150 a barrel during the first quarter of 2022 if an ongoing conflict between Russia and Ukraine leads to a supply shock, economists at JPMorgan said Friday.
The projection arrived as Brent oil so far this year has leapt about 12%, trading at near seven-year highs as strong demand for the commodity is outstripping global supply. Brent during Friday's session fetched close to $88 a barrel.
"The latest geopolitical tensions between Russia and Ukraine raise the risk of a material spike this quarter," JPMorgan economists Joseph Lupton and Bruce Kasman wrote in a research note. "That this comes on the back of already elevated inflation—running at a multi-decade high last quarter—and a global economy that is being buffeted by yet another wave of the COVID-19 pandemic adds to the near-term fragility of what is otherwise a fundamentally strong recovery."
For weeks, Russia has been amassing thousands of troops and artillery at Ukraine's border. Ukraine and the US have warned of an imminent invasion but Russia has repeatedly claimed it's not planning an invasion.
An adverse geopolitical event between Russia and Ukraine would materially disrupt oil supply, with JPMorgan's scenario envisioning a "quick" 100% surge in Brent oil over one to two quarters to $150 a barrel from the average price of $75 a barrel from a supply shock. The bank estimated such a jump would require a a "sharp" cut of 2.3 million barrels a day in oil output, or roughly a 2% drop in total global supply.
"Given that this would be solely a negative supply shock, the impact on output is to reduce global GDP by 1.6%," based on JPMorgan's general equilibrium model, and global inflation could drive up to a rate of 7.2% in the first half of 2022 from 3%, among other estimates.
There are two other channels through which a supply shock could damage global growth, the investment bank said. The first would stem from repercussions of a Russian intervention in Ukraine.
"The US, coordinating with allies, would likely impose sanctions on Russia. While the possibilities vary widely in scope, they will likely impact negatively on sentiment and global financial conditions."
Secondly, JPMorgan said its estimates incorporate the "realized behavior" of major central banks over the past two decades whereby oil price shocks related to geopolitical turmoil have been perceived to pose a greater threat to economic growth than inflation.
"Against the backdrop of a year of already elevated inflation and extremely accommodative policies, central banks may display less patience than normal—particularly in [emerging markets], where rising global risk aversion may also place downward pressure on currency values."