Last week oil prices ended on some gains, however, in this one both benchmarks fell for about 1.5 percent. Dollar Index also increased that put downward pressure on oil. Richmond Fed’s President’s, Thomas Barkin, comments helped oil stabilize a bit. Apart from these developments, I read a very insightful essay by John Mearshiemer in Foreign Affairs, titled: Playing with Fire in Ukraine. It gave me much to think about and one key takeaway that is highly relevant to the financial and commodity markets is that the chances of further escalation are still present. The possibilities discussed, if eventuate, can cause unprecedented damage to the global economy.

I will start with the Ukrainian issue as it pertains to everything else. We might be looking at a single essay by an author but what it really talks about is the greater thread of geopolitical tensions mounting up and presenting an always-imminent risk for global economy. The essay in Foreign Affairs mentions a pertinent fact that there needs to be an end to the current geopolitical conflict unfolding in Ukraine. It simply cannot go on perpetually. Therefore, another question might be of extreme significant value: How will it end? It is here, in the termination of atrocities, that the real challenge lies. All the sides are bent on achieving their goals – which is, of course, to win. “Maximalist” thinking has taken hold. The essay points out some scenarios that can escalate the Ukrainian war into something huge – even a nuclear war. Either of the sides can escalate to end/win the war or more importantly to prevent from losing! Or the third option can be where an escalation happens without anyone delibrately doing it. Similarly, Putin can use nuclear weapon if NATO and U.S. formally enters the war supporting the Ukrainian side. Second scenario, Ukraine might start giving a tough time to Russia itself as support from allies continue to pour in. And the most possible and dangerous scenario can be where the war lingers on and alongwith a mix of sanctions exhaust Russia. The later might desperately resort to nuclear weapons.

Now the likelihood of the aforesaid events actually happening doesn’t seem improbable. Tail risks, headwinds and challenges remain. Therefore, assuming that the worst is behind us might be wishful thinking.

I will stop the geopolitical and now briefly touch upon oil markets. As I described in the starting, oil prices have continue to be under pressure. From a bigger picture angle the continuum where the prices continue to move to and fro has the following points at its ends.

Any news that swerves to the left side causes a bearish reaction in the markets and vice versa. If the Fed said that they will hike more that is related to recessionary fears hence oil prices will drop. Taiwan and China engage in heated rhetoric, the prices will rise. As there is a confluence of factors in the world right now, the prices, I believe, will continue to remain range bound. This is until or unless there is a trigger on either side (escalation in Ukrainian conflict) or Fed really pivots – Mark has done a whole episode on it, highly recommend that the reader watch it.

Closely related to this discussion is the rising dollar index. Recently it touched a monthly high nearing 107.70 as concerns regarding global economic recovery and possibility of rising interest rates kept it elevated.

Take a moment to read the above. It gives us a nice picture of the hawkish tone of Fed and highlights the chances of further hikes. As discussed it will lean towards the left side of that continuum and therefore bearish. Therefore, we might see oil prices coming under pressure in the coming weaks due to a rising dollar as it affects the demand from other countries who have to buy it in greenback.

Overall, volatility continues to reign supreme. Especially after the change in geopolitical risks. Iran deal can shift the balance but we will have to wait for it. Traders should be closely following the realm of rhetoric to see where are we headed.

Happy Sunday