Oil and Gas
Yesterday, Volodymyr Zelensky spoke to the House of Commons in a speech evocative of a Churchillian wartime address. Zelensky called on parliamentarians to increase their support to Ukraine while also requesting that further sanctions be imposed on Russia. This followed Johnson stating that the UK would begin to phase out the importation of Russian oil by 2023 in addition to investigating a ban on Russian gas imports. The UK government’s response is indicative of elsewhere in the West with for example, the EU announcing that it will cut Russian gas imports by 2/3rds within the next year while the Biden Administration declared that the US would ban Russian oil and gas imports after a short settlement period. Roughly, Russia supplies some 8% of the UK’s oil supplies which amounts to 2% of Russia’s total oil exports while in the US, Russian oil accounts for a just 3% of their supplies. Following these developments Brent rose some 6.5% to around $131dpb while WTI rose to $127dpb, as some forecourts in the UK saw diesel prices rise to 186p per litre.


​​​​​In 1999, the American political commentator Thomas L. Friedman posited that “no two countries that both had McDonald’s had fought a war against each other since each got its McDonald’s”. A key tenet of his theory was that globalised countries with McDonald’s would have too much to lose economically to go to war with one another and hence refrain from conflict. While this theory was presented as somewhat tongue-in-cheek, the Russo-Ukrainian war represents another counterexample to this theory along with the US invasion of Panama, the Indo-Pakistan Kargil conflict and the Russian invasion of Georgia in 2008.

Owing to the conflict and following considerable public pressure, yesterday McDonald’s announced that it would “temporarily” be closing some 850 restaurants in Russia and 108 restaurants in Ukraine with the company saying that it would continue to pay staff wages. Hence, McDonald’s has joined a list of growing western TNCs which have ceased operations in Russia as their CEO, Chris Kempczinski, stated that “our values mean we cannot ignore the needless human suffering unfolding in Ukraine”.

According to the Financial Times, Russia and Ukraine account around 9% of McDonald’s global revenue however, they only account for some 3% of its operating income. Indeed, according to The Economist’s Big Mac Index – which tracks the price of McDonald’s burgers around the world – Big Macs in both Russia and Ukraine were undervalued. For example, as of January the Ukrainian hryvnia was 58.1% undervalued against the US dollar with a Big Mac costing 69 hryvnias while costing $5.81 in the US. Meanwhile in Russia, with a Big Mac costing 135 roubles, the index suggested that the rouble was 70% undervalued, although it is worth nothing that since this data was collected in January the rouble has depreciated from around 75 to 133 against the dollar at the time of writing this morning.

The Economist has more:


Nickel Trading Suspended
Yesterday, the London Metal Exchange suspended all nickel trades and cancelled all trades earlier that day, given a doubling of prices during the trading session. This followed news that Xiang Guangda, the owner of Tsingshan Holding Group Co (the world’s largest nickel producer) had short positions on nickel which he appeared unable to meet margin calls on given the increase in prices seen over the last few days. Indeed, some analysts estimate that Guangda would have lost some $2bn on Monday as prices surged. Additionally, China Construction Bank were given additional time to meet margin calls which amount to hundreds of millions of dollars and could be another blow to the already fragile Chinse construction sector.

Chiefly, this 170% increase in the price of nickel over the last few days came as a result of the prospect of major supply shortages from Nickel coming from sanctions on Russia which accounts for some 5% of global nickel supplies and 17% of high-purity nickel production. Any shortage of nickel will likely affect industries including EV production as each car battery contains around 27.5kg of nickel and hence the costs associated with this component alone would have risen from $440 last year to $2,750 today.

The Telegraph has more:


Conflict to Drive Up Inflation
The recent tumultuous trading sessions and the prospect of further sanctions (leading to a haemorrhaging of supplies) have led to the CEBR revising their UK inflation predictions from 7.3% to 8.7% in Q2 2022, indicating a further rise from the current level of 5.5%. Noting the effects of the Russian invasion of Ukraine, these estimates were built on the assumption that wheat prices would remain 50% higher over the year while metal prices would continue to be 30% higher and oil would average $105dpb between 2022-23.

The CEBRs report also estimated that over 2022, disposable incomes would decrease by 4.8% while growth in the UK would stand at just 1.9%  – representing a considerable cut from their previous 2022 growth expectations of 4.2%. Moreover, given their predictions of persistent inflation and market sentiment, the CEBR similarly revised their 2023 growth estimate down from 2% to 0%.


Have a great day.


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