Hive Intelligence Report: What’s Next Now That Europe Has Banned Russian Oil Imports?

Every week, we bring together our community of macro experts to discuss the latest market developments. In this piece, we distil the insights from our conversations up to 6 June. These are views from our network rather than the views of the Macro Hive research team. ‘[Day]’ indicates the day the comment was made.

What’s Next Now That Europe Has Banned Russian Oil Imports?

A recent note from Henry explored why the EU is looking to ban Russian oil.

Does history suggest Europe could keep buying Russian oil? An example from China and Iran.

• China bought even more Iranian crude after the sanctions in 2017 than before as they were buying at a discount – the insurance was handled by the Iranians. The same thing could happen with Russia now.

Does a demand-imposed oil embargo make sense?

• The EUR and USD that Russia received for its export of crude were only good for debt payments which we have now also blocked. In this sense, hard currency is practically useless for Russia. The stuff that Russia was sending us was, on the other hand, super useful to us.

Would suspending Russia from the OPEC quota matter?

• It does little to Russia as that would be on the back of production declines. Even if OPEC agrees to pump more crude oil as a result, it would only be to get volumes back to the levels prior to losing supply from Russia. No additional barrels over current output, even to that level.

Will China benefit from the embargo?

• The European oil embargo is only shifting crude around the global. Thus, making it more expensive for European countries and cheaper for China. Before the war, Russia sent about two million barrels per day to the EU, and about 1.8 million barrels per day to China. The possibility now is of China increasing crude supply from Russia as it comes at a huge discount (even when you factor in the higher insurance and shipping costs).

Have China imports increased?

• There is no evidence yet of China buying more Russian oil in size. Some private small Chinese oil companies have stepped up imports. But the big state-owned enterprises have steered clear.
• However, May shipping data shows that Sinopec and state-owned Zhenhua Oil started buying more. A member of our networks assumes the Chinese need some time to figure out the logistics of buying and shipping Russian crude after Vitol and Trafigure exited that market.

Is the Bank of Japan Turning More Hawkish?

These comments were sparked from a recent Reuters article. Read it here.

• Member One: It is not clear what he is planning. On one hand, ‘Prices are rising particularly for goods that households buy frequently such as gasoline and food, … These kind of price hikes could hurt consumer sentiment, so we need to watch developments carefully.’ On the other hand, ‘It’s important to create an economic environment where wages can rise more’. Moreover, the Japanese PM is not pushing for tighter policy. ‘Kishida said there was no need to change a joint statement agreed upon between the government and the Bank of Japan in January 2013, where the central bank vows to achieve 2% with easy policy’. It’s a big difference with the US administration who want lower inflation.

• Member Two: Kuroda shows pragmatism – lower commodity prices but higher wages – while US policy makers bungle all inflation factors together and let interest rates do the work. So, in theory, Kuroda should like a stronger Yen and an unchanged monetary policy stance. Of course, Kuroda does not have the public pressure US policy makers have, given the massive difference between their respective inflation prints.

Is There a Recession Coming?

This conversation comes following Elon Musk’s recent comments that we’re approaching a recession.

• Members noted that a lot of non-finance people they meet day-to-day are talking about a recession coming in the UK and US, along with how they’re preparing for it. It seems we are effectively talking ourselves into a recession.
• It seems clear that this is part of getting prices down – create a fall in stock and asset prices, and cool hiring – recession seems likely.

Trade Ideas and Themes

• Reducing long USD/JPY [Friday]. Prefer to use AUD for shorts. Moreover, the member think you need to be cognisant of each significant JPY low getting a stream of hawkish comments, such as a recent comment from Kuroda. Lastly, they think we are close to leaving the USD down in a sweet spot again and seeing very substantial but rotating moves.

Read, Listen, and Watch

Read

• Amundi warns that part of private equity market resembles ‘Ponzi schemes’ | Financial Times
• VIX Creators Wants GBTC Converted to ETF | The Pomp Letter

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)