Irrespective of increasing crude oil prices, refining margins for 10 ppm gasoil skyrocketed to unprecedented heights in Asia last Thursday. The crack spread – the difference in price between crude oil and refined products based on it, such as gasoline – climbed to $23.09 per barrel in the Asian session, a $1.46 increase from the previous day. Despite already surging crude prices, the 3-2-1 crack spread in the US is up almost $5 from the beginning of the year. This is a strong indicator that we may see higher crude oil prices in future.
Singaporean Minister of Trade and Industry, Gan Kim Yong, is preparing the public for sharp increments in consumer energy prices. He pointed out the inevitability of diesel, petrol and electricity price hikes brought on by the ongoing conflict in Ukraine. With Singapore primarily importing most of its energy needs, the upsurge in global oil and gas prices over recent months adds to previous price hikes for Singaporean buyers.
He emphasised concerns over the pressures global supply chains face with Ukraine and Russia key wheat and metal exporters. Mr. Gan’s words; “Make no mistake, that while Ukraine may seem far away from Singapore, the conflict there will have a real and significant impact on all of us,” will resonate with many a nation at this time. It is Singaporean consumers who will feel the impact as motorists, homes, and businesses face prompt hikes in their cost of living.
As buyers avoid any Russian supplies of gasoil, refining profits are escalating globally while fears of potential shortages grip the markets. The tight Asian gasoil market is expected to attract even more robust arbitrage demand from Western countries in the coming days. Singapore traders attribute the recent jump in Asian gasoil fundamentals to a spill-over from Europe as they avoid any Russian products.
It is not only oil and gas prices that will soar due to the crisis in Ukraine—they are part of a much broader energy supply chain. In Singapore, almost 95% of all electricity is generated from natural gas. With the price hikes, electricity production costs will soar, with very little room to navigate or counter these increases in the interim.
Singaporean consumers are transitioning to clean energy vehicles, but diesel and petrol are urgently needed. With the sharp rise in oil prices, the production of diesel and petrol will be much more costly—with the end-consumer having to take the punches.
With no end in sight to the war in Ukraine, and crippling economic sanctions against Putin’s Russia, key commodity prices are spiking dramatically. With crude oil dangerously close to USD140 a barrel at the Asian opening on Monday morning, the US is discussing a complete ban on Russian crude— with or without their European allies. It’s all a far cry from oil’s USD 71 average in 2021. Coupled with natural gas prices in Europe at all-time highs, one cannot help but compare current events to the 2008 market crash and devastating recession.
Sanctions against Russia are causing turmoil in the energy markets as companies worldwide progressively seek to disassociate themselves from any Russian exposure. This ‘self-sanctioning’ means that a significant number of businesses are refusing even limited trade with Moscow, despite carve-outs within the official regulations allowing for trade in some goods such as crude oil and other commodities to continue.
The recent rise in energy prices has caused economic worries across Europe. A short recession is inevitable after an already brutal winter, and it could happen as soon as this year, with the United States being struck too. According to the John Hardy, Head of FX Trading at Saxo Bank, “How central banks respond to rising prices may be irrelevant in the near term, and they may have to focus their efforts on systemic risks triggered by the bonfire in Russian assets.”
Although the EURCHF reached new depths of below 1,0200 last week, the EURJPY and EURUSD have not yet moved lower, despite Europe bearing the full brunt of the fallout from the conflict in Ukraine. Eastern European currencies such as PLN, CZK, and HUF have performed considerably worse. The Hungarian opposition is currently trying to portray PM Viktor Orban as a Putin ally, placing the HUF as the weakest of the lot.
When the oil price skyrocketed in 2007-08 and 2011-14, it significantly affected the whole global economy. However, with today’s stronger dollar and more expensive gas, there will be even more significant consequences for global markets, particularly as America has become an ever more prominent participant within them. Amidst the current volatility, US President Biden also failed to ease investor tensions with his less-than-assuring State of the Union speech, where he did not provide any solid solutions to high inflation.
With a global economy that has only just started adapting measures to recover from the COVID-19 economic backlash, current events create unprecedented volatility in the financial markets. Mr. Gan warned Singaporeans to prepare for the increased cost of living as a global fear of oil and gas shortages. The fact that more than 90% of their energy is imported sets the tone for price increases in petrol, diesel, and electricity.
Financial markets meet it head-on with equal volatility and uncertainty when socio-political turmoil erupts. If you are losing sleep currently not knowing how to secure your portfolio, it is good to see what some high-profile traders are doing and advising. It might be too late to re-invest your entire portfolio in a copy-trade, but there are very active pro-steps you can take to safeguard your portfolio while watching the current situation play out.
Every trader has a fight-or-flight response in turbulent times, but now is not the time to blindly sell out your assets, advises Philip Frijs from Saxo Markets. He reminds traders to follow the old rule of staying put in the market instead of trying to time the market and making decisions rashly.
It is hardly possible for any person to predict how the current conflict will unfold from a day-to-day point of view. It makes it very difficult to know when to stay put or jump out. We have to agree with Mr. Frijs that “missing the good days is usually more expensive than being in the market on the bad ones”. If you are desperate or impatient, consider cashing out a part of your portfolio—keeping in mind that with current inflation soaring and low-interest rates following suit, your cash will shrink sitting in a savings account as it loses purchasing power.
Kristin McKenna, Managing Director at Darrow Wealth Management in Boston, echoed the fact that cashing out amidst a volatile market is one of the biggest mistakes traders often make. She went on to say, “Why? Because it’s practically impossible to perfectly (or even adequately) time your exit from the market and your re-entry.”
Looking back over the past 20 years of trading, most of the best days took place within two weeks of the worst days. Interminably entering and exiting the market diminishes returns and can cause unnecessary fees and tax implications.
It is always an excellent strategy to spread your risk, and even more so during times of conflict when economies are tumultuous and volatile. Your approach can transcend diversifying into other asset classes and include various industry sectors and geographical regions. Diversifying safeguards you against the impact of one catastrophic global event affecting your entire portfolio.
To gain insight into asset classes’ benefits, it is essential to understand how they vary and correlate with one another. For example, while some are more volatile than others – like stocks versus bonds – adding them together can result in less risk for your investments because each class’ properties help manage volatility when present within an economy.
Adding bonds to your portfolio can also provide more stability and income. But this is just the tip of the iceberg with the complex macroeconomic factors currently at play. Long-term sovereign bonds from German Bunds and the US Treasuries are options worth considering. Another haven is currencies like the Swiss Franc, Japanese Yen, and the USD.
If your retirement date is 15 or more years out, you can probably not worry too much about temporary downturns. That’s easy to say, but much more difficult in practice when you see your hard-earned savings dropping in value. Nevertheless, for those who hold their nerve and have cash available, ETF investors might have an opportunity to buy into major indexes and depressed levels we haven’t seen for some time.
For those who are concerned about the risk of extremely poor equity performance, options strategies may start to look quite tempting. The idea of using options instead of direct equity holdings is probably more suitable for experienced investors, but the reasoning is sound: there is an upper limit to your potential losses. if you buy an options contract that expires worthless, whereas the shares of a company can, in very extreme cases, go to zero.
This strategy may be of greatest interest to investors with short to medium timescales, those who still have a positive view on global equities and want to include them in their portfolio, but who are nervous about holding shares outright during a market downturn. An alternative strategy is to use one of the various ‘collar’ or hedging strategies, while simultaneously holding equities outright.
The benefits of using this kind of options strategy must be weighed against the potential for increased costs due to leverage – always make sure you are looking at your total potential risk, not just your margin costs. For example, if you are using a strategy where you sell naked puts to collect a premium, without any intention of actually buying the underlying shares, it is possible to become overexposed during major market moves by only looking at the margin costs; this can result in margin calls if the price plummets suddenly.
Not all investors are going to be comfortable using products like options; remember there is more than one way to protect yourself in a bear market, if we are indeed entering one, and simple strategies like buying gold ETFs can also offer some protection against poor equity performance. I recommend looking at your portfolio the following way: if I had the entire value as a cash lump sum, would I invest it in the same way as it is currently invested? If you find yourself answering this question with a ‘no’ – it is probably time to look at making some changes.