Investors are too optimistic about the risks to the oil price from Russia’s invasion of Ukraine, according to strategists at Goldman Sachs Group Inc. He is overly optimistic about the war’s ability to slow monetary tightening.
“The market may be underestimating the risks of tighter supply in oil pricing, which remains a significant risk from the ongoing conflict – so we think the ‘risk premium’ here should probably be larger,” Goldman Sachs strategists led by Dominic Wilson wrote in a note Monday. “The market is starting to exaggerate the impact of the conflict on the Fed trajectory,” he said.
Oil rose above $105 a barrel as Russia’s invasion of Ukraine continued to amplify massive global supply disruptions. Although the US and Europe have so far not directly imposed sanctions on Russian commodities, the trade of these raw materials is hampered by the rising costs of financing and transportation by banks. Russia is the third largest oil producer in the world.
The attack on Ukraine upset commodity markets from oil to natural gas to wheat, increasing inflationary pressures and spooking stock investors. Global stocks have been down for two months this year on concerns about more aggressive monetary tightening and slowing growth, as the economic impact of sanctions on Russia adds to the list of worries.
“Even if we see an eventual reduction in tensions, long-term shifts are likely not only in domestic assets but in policy and economic outcomes,” Wilson wrote in the note, adding that the risks of consistently higher commodity supply, shifting growth and inflation data, rising defense spending in Europe and Russian assets warned of long-term sanctions.
Goldman strategists said the risk of economic growth is higher in the euro area than in the US in the near term, modestly raising the possibility that the European Central Bank will slow the pace of monetary tightening. As for the US Federal Reserve, strategists expect the effect to be more neutral, even though the 50 basis point Fed rate hike in March has now been replaced by 25 basis points.
Goldman Sachs economists raised their U.S. inflation forecasts over the weekend, along with forecasts that the Fed will raise rates more than expected in 2023.