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How Russia-Ukraine conflict could impact global commodity markets

A potential invasion of Ukraine by Russia could be a major risk-off event and send ripples across a number of markets, causing equities to fall and commodity prices to rise even higher,

The US has threatened to impose sanctions on Russia if it moves into Ukraine. Although Russia has said it does not intend to invade Ukraine, it could hold on to commodity assets, driving prices higher. In the advent of a Russian attack, prices of oil would spike and European gas prices would surge.

Typical conflict responses would come into play if Russia attacks, including moves into long-duration Treasuries and a surge in oil prices and European natural gas, MarketWatch quoted Garrett DeSimone, head of quantitative research at OptionMetrics, as saying. In keeping with past patterns, such moves could, however, be short-lived, he said.

Past instances

Although the market witnessed bouts of volatility in 2014 when Russia annexed Ukraine’s Crimean peninsula, it did not have a lasting impact on the global markets, MarketWatch quoted Steve Barrow, head of G-10 strategy at Standard Bank, as saying in a note.

However, investors cannot hope for a subdued reaction in case of a full-scale invasion, he said.

The current situation

Already by the last week of January, the European market had tumbled 3.8 percent to their lowest levels since October after NATO said it was reinforcing its eastern borders as a Russian invasion of Ukraine seemed likely.

London’s FTSE 100 index fell 2.6 percent to a one-month low of 7,297 on January 24, clocking its biggest fall in two months. In Frankfurt, the DAX index fell 3.8 percent, while France’s CAC saw shares go down by 4 percent, The Guardian reported.

In the US, the dollar could strengthen in case of an invasion. Meanwhile, in the past five days, the Russian ruble, off 2.2 percent for the year, has gained 4.1 percent and outperformed other emerging market currencies.

At present, the markets are not worried as another round of US-Russian talks are likely to take place soon, CNBC quoted Marc Chandler, chief market strategist at Bannockburn Global Forex, as saying.

“Markets aren’t as concerned about it as maybe as much as the politicians,” Chandler said.

Commodity to take a hit

If Russian tanks cross the border to Ukraine, oil prices will move beyond $100 a barrel, RBC head of global commodities strategy Helima Croft told CNBC.

The impact will be felt on the European gas and wheat markets, Croft said.

Russia is the world’s largest wheat exporter. Ukraine and Russia together account for nearly 29 percent of the global wheat export market.

Energy as a weapon

Being one of the largest energy producers of the world, Russia exports about 5 million barrels of oil a day. Europe gets about a third of its natural gas from Russia.

Gas flows from Russia come to Europe not just through a Nord Stream I pipeline, but also pipelines going through Ukraine. If Ukraine was in conflict with Russia, the energy flows would be halted amid heightened concerns of infrastructure damage.

Already oil prices have been moving higher because of tight supply and tensions over the conflict.

On Wednesday, natural gas prices in Europe stood at $25 per million BTU, which is over five times the US price.
Source: CNBC TV

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