Against all hope and diplomatic efforts, Russia did the unthinkable and started the first major armed conflict on European soil since the end of WW2. Sanctions, as expected have followed with more to come. This has sparked a risk-off sentiment and a flight to safe-haven currencies. Sanctions have been targeted and for the time being exclude oil exports from Russia. The Ruble has plunged 30% following the SWIFT ban and a Russian hard currency bond default is looking increasingly likely. The combination of targeted sanctions and anti-Russian sentiment have supported commodities in which Russia has a large presence. These include aluminium, oil, natural gas, copper and cobalt. This comes against a back-drop of thin spare capacity and supply chain challenges which were already driving prices higher.
The oil price rally which was well underway before the invasion became turbo charged with Brent currently sitting at $118 per barrel. As discussed in previous roundups, spare capacity is at record lows and any supply disruption, or indeed perceived supply disruption will drive prices higher. Russia, as a member of OPEC+ has been failing to meet its agreed quota for the past 3 months. The West has avoided placing sanctions on Russian oil, but this has not stopped buyers from shunning Russian cargos because of the invasion. An estimated 66% of Russian oil is struggling to find any buyers according to JP Morgan analyst, Natasha Kaneva.
Russia is a significant world player in crude and condensates with a market share of ~10%. A removal of this supply will be difficult to replace and if the supply hit persists, JP Morgan says $185 is in view. Diesel is feeling the heat more than crude, with tanker companies unwilling to touch Russian cargoes. Refined diesel prices are around $150 a barrel, having risen faster than crude. Russia accounts for a large share of European diesel imports.
Base metals, already on the up due to power shortages, energy costs and Chinese environmental restrictions, are now reeling from the invasion. Again, Russia is a significant supplier in several key metals and supply disruptions are guaranteed. Aluminium hit an all time high of $3,850/tonne on 4th March with ~900,000 tonnes of Russian supply at risk. Nickel recorded a 7-year high on 3rd March of $27,976/tonne. Copper is close to record prices, zink is at a 15-year high and the base metals rally continues to gain pace.
Gold unsurprisingly is up on the invasion and holding above $1,900/oz. We may see further bullish moves as highly indebted developed economies begin removing stimulus packages and face the possibility of stagflation. Russia is a significant producer of both palladium and platinum, and we can expect supply disruption here too. Market uncertainty following the invasion is triggering a huge move into safe-haven precious metals.
Bullish factors working in favour of both gold and silver markets include stagflation fears and more gold buying from investors and central banks. "Renewed SWIFT chaos, cyber-attacks, destabilizing FX markets & inflation = beginning of a change in the monetary & financial system = gold is a safe store of value until clarity," said MKS PAMP SA head of Metals Strategy Nicky Shiels.
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