With heightened volatility and fearful headlines flooding the media, it is important to stay up-to-date on current events that could impact the market. In today’s Steady Investor, we take a look at:
How Reliant is the U.S. on Russian Oil? As the war in Ukraine continues, the impact on oil markets has come squarely into focus. Russia is the world’s third largest oil producer, so a meaningful disruption to supply – whether in the form of export controls or declining production – could send crude oil prices even higher. With the energy markets in focus, many market-watchers are realizing for the first time perhaps that the U.S. imports Russian oil, even though our country is the world’s top oil producer. Why do we import, and how reliant is the U.S. on Russian oil? There are two answers to the first question. For one, the U.S. still consumes more oil than we extract domestically, so some imports are necessary. But most oil imports do not come from Russia – the U.S. imports a majority of its oil from Canada, with Saudi Arabia and Mexico also supplying significant amounts. Russia supplies far less, about 8% of total U.S. imports of oil and refined products. The other question is why the U.S. imports at all if we ultimately end up exporting millions of barrels a day from the Gulf Coast? The answer to that question falls back on a law passed about a century ago, called the Jones Act. The Jones Act limits the size of vessels that can travel between U.S. ports, meaning that buyers on the East and West Coasts of the U.S. are unable to get adequate supplies in a cost-effective way from the Gulf Coast. Hence imports from abroad.1
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The Federal Reserve Eases into Rate Hikes – Federal Reserve Chairman Jerome Powell appeared before the House Financial Services Committee this week, to field questions about rising inflation and the Fed’s plans to combat it. Powell offered the markets some relief when he said he would propose a quarter-percentage point increase from the central bank, which came as a positive surprise to Fed watchers anticipating a 50-basis point increase later in March. It is quite possible that Russia’s invasion of Ukraine has slightly shifted the Fed’s thinking, as they want to be careful not to create additional headwinds for the economy in an uncertain time. Even still, Chairman Powell committed to following a path of several rate increases this year, and did not rule out half-point increases later in the summer.3
Sanctions on Russia Pile Up – What Does it Mean for the Global Economy? Western nations have been united and systematic about piling-on sanctions on the Russian economy, and many companies in the private sector have followed suit in cutting off many services and product sales. What started as sanctions on Russia’s oligarchs has expanded to nearly every corner of the economy, and now includes Russia’s central bank and other major banks. The fallout for the Russian economy has been swift and painful – the Russian ruble has plummeted in value relative to the dollar, Russian markets have been closed for days (though a Russia-linked ETF traded in the U.S. if off by over -50%), and interest rates have soared from 9.5% to 20% in a matter of days. Russian citizens have been blocked from sending money overseas as capital controls have gone into effect and Russia attempts to curtail the capital exodus. In a matter of a week, Russia has been all but cut off from the global financial system, which arguably powered its transition from a government-controlled economy before the Cold War to the modern, market-based economy it became. In terms of the global economy, Europe has the closest economic links with Russia, largely in the form of the energy trade. But global financial markets are largely insulated – levels of Russian debt held by foreign banks are negligible, and the U.S. economy has very little direct exposure to the Russian financial system and export markets.4
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