Geopolitical shock could push oil above $100/bbl: Jahangir Aziz

Russian President Vladimir Putin recognised two breakaway regions of Ukraine- Donetsk and Lugansk as independent on Monday. On the back of this, US President Joe Biden announced financial sanctions in the parts of Ukraine that were recently recognised as independent by Russia. Joe Biden has also announced that further financial sanctions could follow suit if Russia continues to disrupt peace in the region. The recent Russia-Ukraine tensions have also caused crude oil prices to spike.

In an interview with CNBC-TV18, Jahangir Aziz, Head of Emerging Markets Economics Research & Commodities, JPMorgan, said that oil prices could cross $100 per barrel in the face of a geopolitical shock.

He said, "Our baseline, in the absence of any untoward geopolitical events, is that the demand and supply dynamics suggests that oil should average on $90 a barrel."

He added, "However, in the event, if we do get a geopolitical shock, then oil will easily go above $100 and we are looking at it even if there isn't a full-fledged invasion-like situation; but if the tensions continue, or the tensions escalate, and let us say it continues for the next three or four months, you could easily see oil breach $110, $115 a barrel, at least still summer."

Aziz also cautioned that one cannot underestimate the impact of financial sanctions. He explained that in case of a move by Russia that the US considers as an act of invasion of Ukraine, extreme sanctions may be imposed. Emphasizing on financial impact of the same, Aziz said that it could be extremely volatile outside of Russia.

He said, "In the event of an act, which US considers to be an invasion of Ukraine all the sanctions that are being talked about in the US Congress, at this point in time, will be imposed, and will be imposed at its extreme level. That is a very sharp difference between previous use of sanctions as a proportionate reaction or response versus now that all of these sanctions across the board will be used at its extreme level."

On the US Fed rate hikes, Aziz believes what is noteworthy is whether the cycle will be different than before or not. He mentioned that the rate hike cycles are likely to be different this time around due to different economic factors.

Aziz said, “The question is, is 2021’s rate hike cycle going to be different from the 2015 to 2018 rate hike cycle? If you talk to economists like me, we will say that no, this time it is different and it is different because households and corporate balance sheets are far stronger today than they were in 2015.”