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Market Extra: Why the U.S. ban on Russian oil imports differs from the 1970s embargo for markets

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U.S. oil prices topped $123 a barrel on Tuesday, a level last seen in 2008, after the Biden administration banned Russian oil, natural gas and coal imports in retaliation for Moscow’s invasion of Ukraine.

The executive order also raised concerns about the potential for war in Eastern Europe to damage the American economy, as commodity prices soar and consumers feel the pinch of gasoline above $4 a gallon.

“From my perspective, the biggest takeaway is not to panic,” said Kristina Hooper, Invesco’s chief global market strategist, in a phone interview. “We have gone through crisis before — and very significant price shocks — and it doesn’t end the growth potential of stocks.”

Increased oil prices
CL00,
+0.91%

are ratcheting up the risks of stagflation, or stagnant economic growth with high rates of inflation. But Hooper said while high energy costs have pushed inflation to 40-year highs, there are signs of potential easing pressures in the form of moderating wages and cooling consumer spending.

“Stagflation, I would assign it a 25% to 30% probability,” Hooper said. “I don’t want to minimize the risks presented by higher oil. But we don’t rely on imported oil as much as we did in the 1970s.”

President Joe Biden on Tuesday said the decision to ban Russian oil products “is not without costs here at home,” adding that “Putin’s war is already hurting American families at the gas pump.”

The Organization of Petroleum Exporting Countries’ 1973 oil embargo put more strain on an already stressed U.S. economy, but also led to energy-conservation measures, including 55-mph speed limits on American highways and the establishment of the Strategic Petroleum Reserves.

What’s also different now, Hooper said, is the pandemic taught American companies the benefits of staff working from home in a crisis. “With a hybrid work approach, what we felt at the pump wouldn’t be as much as pre-pandemic,” she said.

Russia is the world’s second-biggest petroleum exporter and usually exports 4.5 million barrels of crude and 2.5 million of oil-products each day, although the White House said Tuesday that last year the U.S. imported only 700,000 barrels per day of Russian crude oil and refined products, less than 10% of U.S. energy imports.

U.S. stocks fell for a fourth day in a row Tuesday, leaving the Dow Jones Industrial Average
DJIA,
-0.56%

deeper in correction territory, and the Nasdaq Composite Index
COMP,
-0.28%

further into a bear market.

Fitch Ratings said Tuesday it expects U.S. consumer price inflation to peak at about 8% in the first quarter, and average 5.5% later this year. The credit rating firm also said most multinational companies have low exposure, in the “single-digit” percentage of total revenues, to Russia.

Darwei Kung, head of commodities and portfolio manager at DWS Group, said the potential for oil to hit $200 a barrel or higher “is not crazy,” as some traders have predicted, particularly since it’s unclear how long Russia’s attack on Ukraine will last.

Traders also can’t predict the duration or full scope of sanctions against Moscow by the U.S. and its allies as the conflict wears on. Big oil companies, including Exxon Mobil Corp.
XOM,
+0.76%
,
BP PLC
BP,
+4.39%

and Shell PLC
SHEL,
+2.68%

have been pulling up some stakes in Russia, but prolonged sanctions could mean a lack of capital, labor and trade needed to sustain new Russian oil wells when old ones dry up, he said.

“At some point, it could leave them less productive, and that would mean a permanent impairment for Russia production,” Kung said. “Right now we don’t have any clarity.”

Also read: ‘Russian commodities today are like subprime CDOs were in 2008’, says rates strategist

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