The Tribune

ACTIVTRADES WEEKLY

By CHRIS ILLING

www.activtrades.bs

THE US Federal Reserve apparently intends to raise interest rates significantly – and reduce the balance sheet. Fed Reserve governor, Lael Brainard, signalled this aggressive action.

In view of high inflation, the US Federal Reserve wants to raise interest rates and probably shrink its balance sheet as early as May. This is according to the minutes of the Federal Reserve’s March 16 monetary policy meeting, released on Wednesday. Accordingly, many of the monetary watchdogs believe it is appropriate that a large interest rate hike of 0.5 percent - or even several such increases in the future - may be appropriate. This applies if inflation risks remain elevated or even intensify. At the March meeting, many members of the Federal Reserve’s Open Market Committee responsible for interest rate policy were already in favour of taking such a large interest rate hike.

However, the committee decided to raise interest rates by a quarter of a point from 0.25 percent to the new interest rate level of 0.5 percent. This decision was probably taken against the background of uncertainty caused by the Ukraine war. Delivery bottlenecks in the wake of the COVID-19 crisis have led to consumer prices recently rising by 7.9 percent, the highest rate of increase in more than 40 years.

According to US Treasury secretary, Janet Yellen, the global price of oil would probably “go through the roof” if Russian exports were completely blocked. Many states, especially in Europe, are “very dependent” on Russian oil, Yellen said at a hearing in the US House of Representatives. “We want to inflict maximum pain on Russia, but also be careful not to inflict undue pain on the Americans and our partners,” she added.

The US has banned imports of Russian oil because of the Ukraine invasion, although imports made up only a small part of the US supply. A complete blockade of Russian exports is currently not desirable in view of the high demand with roughly the same supply, said Ms Yellen. She added that once other countries and producers increase their oil production, it might be possible to limit Russia’s exports even further. Crude oil prices have already risen significantly since Russia’s conflict with Ukraine began

The Paris-based International Energy Agency (IEA) announced last Wednesday that member states would supply the oil market with 60m additional barrels of crude from emergency stockpiles. The news sent oil prices down more than 5 percent, with US crude futures tumbling to $96 per barrel. Brent crude, the global benchmark, fell to $101 a barrel.

Russia could be forced to cut its production by 3m barrels per day this month as it struggles to find buyers following the invasion of Ukraine. The large oil companies, meanwhile, are experiencing a tremendous roller coaster ride presently. During the last 12 months, Shell’s share price is up 55 percent, British Petroleum’s (BP) by 40 percent and Exxon’s is up almost 50 percent. But all companies are now under pressure to pull out of Russia.

Shell said last Thursday that it will write down up to $5bn as a result of the decision to seize their Russian business. The company had said the Russia write-downs would reach around $3.4bn earlier in the month.

According to the star US investor, Warren Buffett, a lot of cash and war do not go together. At least that is what he said in 2014, when Russia annexed Crimea. The risk of a currency depreciating massively is too great.

But now Mr Buffett is betting on the future of oil. Berkshire Hathaway this week increased its stake in US oil company, Occidental Petroleum, by about $1bn. In the past few weeks, Mr Buffett and his holding company have been making substantial gains in these stocks. Overall, Berkshire now holds almost 15 percent of the oil company. Tumultuous times with great potential for the savvy investor.