After continued warnings from the United States and its allies that Vladimir Putin might be considering invading Ukraine – which he has repeatedly denied – the Russian president has formally recognized two self-declared republics in eastern Ukraine. Ukraine and ordered what he called “peacekeeping forces” into the areas.
Western leaders have condemned the moves, with the United States and the United Kingdom planning to announce new sanctions as early as Tuesday, while the European Union begins the process of agreeing sanctions.
Markets have been on edge for weeks, and any real conflict – or sanctions – could push energy and food prices even higher and plunge Europe into a major supply crisis.
Crude oil is approaching $100 a barrel and European natural gas jumped on Tuesday. Other commodities also rose, with aluminum approaching a record high and wheat climbing to a one-month high. Gold, a secular safe haven, is near its highest level since June.
“Rising geopolitical tensions further amplify the case for commodities, given Russia’s significant impact on global commodity markets,” JPMorgan Chase & Co said in a report.
Sanctions could lead to food and energy shortages, driving up prices of both, Bloomberg Intelligence said recently.
Capital Economics said the biggest impact is likely to come from commodity prices, and in the worst-case scenario oil could hit $120-$140 and gas jump higher, adding about 2 percentage points to headline inflation. in advanced economies this year.
Agreeing on the scope of the sanctions will not be easy as Russia’s measures do not constitute a clear military attack, while the sanctions could threaten to further increase the prices of key products at a time when household budgets are already strained.
The first steps could be to penalize individuals involved in the recognition of the two breakaway regions in eastern Ukraine, a more limited move that could happen fairly quickly.
As traders and policymakers scrutinize every move and deadlocked commentary, here’s a look at the potential implications for major commodities.
So far, one of the biggest impacts has been on European gas markets. Geopolitical tensions have been amplified by already tight supplies from Russia and below-average stocks, as prices in the region have almost quadrupled over the past year.
A full-scale conflict could disrupt the massive volumes that Russia sends to Europe, about a third of which typically go through Ukraine.
Sanctions could affect trade and prevent a new pipeline, Nord Stream 2, from delivering Russian gas to Europe. All of this could have a big impact on stock replenishment in the summer, making next winter difficult as well. Prices could rise even higher and wreck the European economy. Russia would also lose huge amounts of revenue.
Yet many believe the gas supply is unlikely to stop, or even be significantly reduced. Russia plans to continue uninterrupted gas supply to world markets, Energy Minister Nikolai Shulginov said in Qatar, where he is attending a gas forum.
Foods and fertilizers in danger
A major casualty could be even higher food prices. Ukraine and Russia are together heavyweights in the global wheat, corn and sunflower oil trade, leaving buyers from Asia to Africa and the Middle East vulnerable to bread and more expensive meat if supplies are interrupted. This would add to food costs which are already the highest in a decade.
When Russia annexed Crimea in 2014, wheat prices jumped even though shipments weren’t significantly affected. Russia’s and Ukraine’s share of world exports has since grown, with countries like Egypt and Turkey dependent on the Black Sea breadbasket.
So far cargo is still flowing freely and there are no indications of major disruptions. But if that happens, world markets already struggling with dwindling grain stocks could see further shortages.
Russia is also one of the world’s largest exporters of the three main fertilizer groups. Any reduction in supply can cause already high nutrient prices to spike, affect crop yields and cause further food inflation.
Traders are also pricing in the risk of disruption to Russian exports of metals, including aluminium, nickel, palladium and steel, even as analysts point out that directly targeting Russian producers with sanctions would be a major target for Russia. ‘West.
US sanctions against United Co Rusal International PJSC sparked turmoil in the aluminum market in 2018, and policymakers may not want to risk a repeat. Shares of Rusal have plunged in Hong Kong in recent days.
But if Russia were cut off from the Swift international payment system as part of sanctions, it would slow the flow of funds and affect exports. Any disruption in gas flows could also exacerbate problems for metal producers in Europe, which have cut production in response to high energy prices.
Even short-lived disruptions could have an outsized impact at a time when manufacturers are already facing critical shortages of metals, from aluminum to zinc. The fallout could be particularly dramatic in the palladium market, where Russia accounts for around 40% of the world’s supply.
The country is less dominant in base metals, but remains one of the world’s top suppliers, with JPMorgan estimating that it accounts for around 4-6% of global refined copper, aluminum and nickel production.
Any disruption in oil flows from Russia, with little spare production capacity in other countries, could easily push prices up.
JPMorgan analysts even tested the possibility of a peak at $150. Prices in London are approaching $100 a barrel. Additional sanctions on top of those already affecting the Russian oil industry could push oil up much faster.
At this price, the impact on the global economy could be debilitating. This is one reason why many do not expect the sanctions to be so severe that oil flows will be significantly affected. Additionally, Saudi Arabia and a few others in the Middle East could potentially fill the void.
Still, traders remain pissed off. About half of Russia’s oil and condensate exports go to Europe. Disruptions could wreak havoc and force trade routes to change.