Ukraine Crisis: Immediate Implications For Commodities

The escalation of military tension in Crimea could have significant implications for global commodity supply chains and we are thus recalibrating many of our short-term price views. A direct Russian intervention to defend the country's interests in Ukraine was not our core view, but tensions between the two countries have since increased significantly with a build up of Russia military presence in Crimea over recent days. While the diplomatic situation remains fluid, we see economic sanctions imposed by Western powers on Russia as a potential scenario. We are currently exploring the impact on the global commodities supply chain of such an outcome, but for now present the most pressing near-term implications. In particular, we flag significant upside risks to the price of grain and energy, for which Russia is a major global supplier. Gold prices also face upside risks due to the threat these events pose to global economic growth.

Energy: In The Crosshairs

Unsurprisingly, we flag significant upside risks to oil and gas prices. We are currently exploring the likelihood and potential impact of disruption to Russian oil and gas exports, particularly for the European market. Whether or not disruption occurs, uncertainty looks set to last over the coming weeks and this should boost energy prices. In particular, Brent Crude has broken resistance at US$110.50/bbl and we see room for further gains in the days ahead. Of particular concern to the eurozone economy, natural gas prices face even more significant upside risks than oil due to Russia's status as the dominant gas supplier to the region. NBP (UK) and German Gas prices have already ticked up 6.0% and 3.4% on March 3 and any move closer to economic sanctions on Russia would see them rise further, due to the potential for Russia to restrict gas flows west as a retaliatory move.

Oil Boost
Front-Month Brent Crude, US$/bbl (daily)

Ukraine Crisis: Immediate Implications For Commodities

The escalation of military tension in Crimea could have significant implications for global commodity supply chains and we are thus recalibrating many of our short-term price views. A direct Russian intervention to defend the country's interests in Ukraine was not our core view, but tensions between the two countries have since increased significantly with a build up of Russia military presence in Crimea over recent days. While the diplomatic situation remains fluid, we see economic sanctions imposed by Western powers on Russia as a potential scenario. We are currently exploring the impact on the global commodities supply chain of such an outcome, but for now present the most pressing near-term implications. In particular, we flag significant upside risks to the price of grain and energy, for which Russia is a major global supplier. Gold prices also face upside risks due to the threat these events pose to global economic growth.

Oil Boost
Front-Month Brent Crude, US$/bbl (daily)

Energy: In The Crosshairs

Unsurprisingly, we flag significant upside risks to oil and gas prices. We are currently exploring the likelihood and potential impact of disruption to Russian oil and gas exports, particularly for the European market. Whether or not disruption occurs, uncertainty looks set to last over the coming weeks and this should boost energy prices. In particular, Brent Crude has broken resistance at US$110.50/bbl and we see room for further gains in the days ahead. Of particular concern to the eurozone economy, natural gas prices face even more significant upside risks than oil due to Russia's status as the dominant gas supplier to the region. NBP (UK) and German Gas prices have already ticked up 6.0% and 3.4% on March 3 and any move closer to economic sanctions on Russia would see them rise further, due to the potential for Russia to restrict gas flows west as a retaliatory move.

Gas Is Key
Germany - Day Ahead Natural Gas Price, EUR/mwh (daily)

Grain: Threat To Black Sea Exports

We have removed the bearish wheat view from our commodities strategy table on the back of increased volatility created by the recent Russian intervention in Crimea. Russian naval forces, which are now controlling Ukraine's access to the Black Sea in the south, could limit exports from the main ports of Odessa and Illichivsk. In addition, there is potential for sanctions by Western powers on Russia to restrict Russian wheat exports.

A Break Of Resistance To Come?
Front-Month CBOT Wheat (USc/bushel, weekly) & RSI (Below)

We believe the recent events in Crimea will increase volatility in grain markets as both Ukraine and Russia are major exporters of wheat and corn. CBOT Wheat increased by 7.8% over February 28 to March 3 on the back of the intervention, which pushed prices higher than the stop loss (at USc620/bushel) on our bearish wheat view. Our view was premised on improving US weather but also on strong Russia export capacity (and the Black Sea region more generally) before the start of the 2014/15 harvest, which would have dragged wheat prices lower in the coming months. However, uncertainty over Ukraine's capacity to export and potential economic sanctions on Russia is adding a significant risk premium to wheat prices in the short term. In fact, even if Ukraine manages to continue to export wheat (and corn) in the coming months, we fear that potential economic sanctions on Russia (financial or trade sanctions) could limit wheat exports out of the country and force large importers to pay a premium for shipments from elsewhere before the 2014/15 harvest starts in June.

Gold: Testing Resistance

Gold prices face upside risks and we have closed the bearish view in our commodities strategy table at a loss of 0.83%. The threat to global economic growth from sanctions on Russia (and any Russian economic retaliation) could catalyse demand for perceived safe haven assets such as US fixed income and precious metals. Spot gold is currently testing resistance in the US$1,350/oz area and a push above this level could spark a significant further rally towards the US$1,400-1,500/oz area.

Breakout Risks
Spot Gold, US$/oz (Daily with RSI)
Global Commodities Strategy - Closed Views
AGRICULTURE Date Opened Date Closed Gain/Loss
Bearish wheat (front-month CBOT) 27-Feb-14 03-Mar-14 -3.85%
Bullish corn (Front-Month CBOT) 11-Nov-13 20-Nov-13 -2.39%
Bearish rough rice (front-month CBOT) 29-Aug-13 15-Nov-13 4.90%
Bullish soybean/corn ratio (front-month CBOT) 05-Jun-2013 16-Jul-2013 16.81%
Bullish cocoa (front-Month LIFFE) 16-Apr-2013 28-May-2013 0.00%
Bullish coffee (front-month Arabica) 06-Dec-2012 23-May-2013 -6.92%
Bullish sugar (ICE #11 World, front-month) 11-Mar-2013 15-May-2013 -9.88%
Bullish palm oil (three-month MDE) 21-Feb-2013 17-Apr-2013 -9.62%
Bearish S&P GSCI Grains Index 13-Sep-2012 16-Jan-2013 9.65%
METALS
Bearish spot gold 27-Feb-14 03-Mar-14 -0.83%
Bearish spot silver 13-Nov-13 06-Feb-14 4.28%
Bearish three-month LME copper 27-Nov-13 27-Dec-13 -2.58%
Bullish platinum (spot) vs gold (spot) 29-May-13 28-Oct-13 1.74%
Bearish iron ore (SGX Asiaclear Swap)* 05-Sep-2013 18-Oct-2013 -1.45%
Bearish iron ore (SGX Asiaclear Swap)* 16-Jan-2013 07-Aug-2013 11.89%
Bullish base metals (S&P GSCI Industrial Metals Total Return) 31-Jan-2013 21-Feb-2013 -2.10%
Bullish gold (spot) 02-Aug-2012 15-Feb-2013 2.91%
Bullish tin (three-month) vs LME Metals Index 20-Aug-2012 14-Jan-2013 15.40%
Bullish S&P GSCI Industrial Metals Index 08-Aug-2012 14-Dec-2012 8.80%
Note: Returns do not take into account roll yield, unless stated otherwise. *SGX Asiaclear Iron Ore, cfr China 62% Fines (Third Month Swap). Source: BMI, Bloomberg
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