There’s another interesting consequence of the sanctions: « oil contracts » are, largely by default, denominated in U.S. dollars. When the contract is paid, a significant portion of that amount ends up in oil-exporting countries’ central banks as « petrodollars », keeping them outside of the U.S. money supply. For quite some time now, China and India – the world’s 2nd- and 3rd-largest energy consumers – have been pushing for contracts priced in their currencies. This is because a rising dollar and rising crude prices act as a « double whammy » to their balance of trade. The latter may be unavoidable sometimes but their reasoning is that the former can be arranged, at the very least.

Since the sanctions began, India has been purchasing large amounts of deeply discounted oil from Russia. With the discount, the transit risk and increased transit costs could be managed. Just before April, Russian oil imports – because of the transit costs – accounted for just a little over 1% of total imports. In May, Russian oil accounts for almost 18%. Furthermore, it was reported on the 20th of this month that Russian and Indian banks are close to an agreement wherein rupee/rouble transactions would be enacted without using the U.S. dollar as an « intermediate step ». China has also increased imports from Russia and, interestingly, is working on an agreement to pay for Saudi oil using Chinese yuan. Many officials in Saudi Arabia are reportedly in favour of this since the earned yuan can be used to pay Chinese companies operating in the country while diversifying their bank deposits.

This has several consequences over the long term. If other currencies such as the rupee and yuan become acceptable in oil contracts (which looks increasingly likely), the « petrodollars » will find their way back to U.S. shores, thus creating an increase in money supply, which will exacerbate inflationary pressures.

All in all, this is a very complex situation that brings about a lot of uncertainty, that will almost certainly create significant volatility in crude oil prices in both the upside and downside beyond the historical effects of the Fed rate hike. Disciplined investors who are savvy to news and developments can likely find many short-term tactical opportunities in the situation that can potentially boost their portfolio returns, if they play their cards right.