As always, many massive transformations are taking place all at once — with the Bank of England expected to follow suit with the Fed’s continued hike of interest rates amid strong job forecasts, and Saudi Arabia increasing the cost of oil to the US while lowering it for Asia and Europe.
Worldwide stocks and the FTSE dipped into the red after the US reported more jobs on the market than anticipated. This saw European stocks finish in the red after the US reported better non-farm job reports than expected.
London’s FTSE 100 dropped by 0.2% on 7 October, occurring one day after Fitch became the second credit ratings agency to forecast a negative outlook for the UK economy, lowering the credit outlook on British government deficit to “negative” from “stable.”
Paris and Frankfurt also reported lowered closing reports. The Fed continues to aggressively hike rates. Meanwhile, mortgage costs across the UK increase as housing prices cool off.
How Events Played out
The polarization of central banks continues, seeing the Fed spearhead along with hiking up interest rates forcing the Bank of England to follow suit.
Meanwhile, Saudi Arabia is increasing oil prices for the US market once more, albeit ignoring costs for Asia and Europe. The shipments of Arab Light crude oil to Asia in November from the national producer will largely stay the same at about £5.85 billion per barrel over benchmark costs. This is despite a Bloomberg estimate that there would be a £0.40 increase per barrel.
However, for US shipments, £0.20 were added per barrel, but there were reductions in Mediterranean and European oil.
All of the countries in OPEC have agreed to production cuts in receiving Russian oil, including Venezuela and Saudi Arabia; this oil production cartel has the primary function of controlling the production of oil. This is also something that the UK and other members of the collective west has been trying to do for the last couple of months after the Ukrainian crisis.
The western objective has been to accomplish control of oil prices through various means, including putting a price cap on Russian oil by enforcing it vis-à-vis the insurance industry. However, this is anathema for OPEC, which refutes decisions of oil prices being decided by insurance industry mechanisms — agreements instead continue to happen through discussions between places like Riyadh, Tehran, Caracas, and Moscow. All areas represent the biggest oil producing regions, apart from the US.
Crux of FTSE and Wall Street Deppreciations
BlackRock recently advised most investors to avoid most stocks due to phenomenal risks at present acting on the major markets.
Reasons compounding this relate to energy problems. Forcible attempts to “fix” or “cap” oil production costs on an international scale have ironically destabilised oil prices. Ironically, this has prompted OPEC to increase rates for the US.
If the UK wants to get favourable oil prices — in order to stabilise its energy problem and resolve the underlying problem responsible for its downgraded credit rating by Fitch ratings agency as well as S&P — OPEC has previously warned during the beginning of the crisis that Britain, Europe, and the US needs to engage with Russia in order to successfully a engage with OPEC and ensure smooth functioning of oil supplies.
The result of sanctions launched against Russia is a stabilisation of the worldwide oil markets, splitting them up into greater and greater segments.
Energy and Stock Market Implications for Asia vs. Europe and the US
The future of energy distribution will look like reduced cost of gas and oil in Asia relative to collective western regions — this is because it is importing important oil from wherever it is available, including Russia, the Gulf and Africa. By comparison, oil for the UK, Europe and the US will be more expensive as disputes over doing business with Russia or affiliated countries remain.
Italy is the most recent European country to decide to open up trade with Russia again. Russia has duly obliged to provide Italy with energy, with Italy stating that it should be prepared for winter resultantly.
Russia is the second largest producer of oil, which is severely disrupting its ability to meet its required energy storage.
The bewildering aspect of this, admittedly, is that before the sanctions were put into effect, oil production by the major Western companies like Exxon And Texaco mutually warned (or there was awareness in the markets of the long-term implications of an embargo) that the leadership elite needed to avoid sanctions because it would cause major imbalances in the world markets, enraging the Saudis as well as OPEC.
It was known that the EU was very reliant on Russian oil, representing roughly 35% of its natural gas, with some countries more dependent than others. Already at the beginning of the Ukrainian war, natural gas was 10 times as expensive as a year previous to January 2022.
This sanction has now happened of course.
OPEC Aligns With Own Soverign Interests (Instead of the UK, EU, & US)
All attempts by the European central banks to influence OPEC decisions through insurance mechanisms have failed. The most powerful member states, for instance Saudi Arabia which is the third-largest producer of natural energy has at its forefront concern national security and the stability of oil for its own state. OPEC has determined that relations with Russia are of vital importance to its proper function.
In effect, OPEC has sided firmly with Russia, who is currently the nemesis of Europe and the US.
OPEC Member states are acting as sovereign nations, once again hearkening to multi-polarisation and the end of hegemonic influence by US and European leadership.
Ten years ago, Saudi Arabia would not have deigned to side against the US. However, times have changed radically. Today, it has actually slashed production quotas for the US, with the White House claiming that it has aligned with Russia.
European and US stock markets have been affected, due to the downward effects of energy costs vital for businesses at every level. The general pattern is that energy costs are becoming cheaper in Asia, rising in the US and hovering in Europe — Italy recently struck a deal with Russia, taking a decided stance away from the EU and it sanctions policy.
This is an immense political sign that there is discontent with OPEC regarding the level of Instability caused by sanctions — much of this sets a dangerous precedent.
Conclusion — The Aftermath Distribution
OPEC member states like Saudi Arabia understand they have many other options than the US. For instance, Russia, which is currently very powerful, and China. The Middle East is currently rather stable. And Saudi Arabia is now pursuing their own interests — this comes after Saudi Arabia gains a new leader.
By comparison, leadership in Europe is waning, with the likes of Churchill non-existent and energy policies taking an irrational turn in the UK — Britain recently announced a possible three-hour blackout announced a day in advance on scheduled days.
In terms of the aftermath of this energy imbalance, Europe will be the first to be hit. Germany is the most exposed. The Biden administration also has a finite amount of energy reserved, which suggests a larger knock-on effect on the US economy at a later stage. There is speculation that the US may also cut off exports via LNG to Europe, which would further hurt Europe.