Fear of Russia-Ukraine crisis impacting commodities market

Several commodity markets are starting to price in some geopolitical risk around the growing tension between Russia and Ukraine. There is still plenty of uncertainty over how the situation will evolve, but it is still worthwhile to look at what the potential impact could be should tension boil over into a conflict.

A scenario where the West fails to react with tough sanctions against Russia if it were to invade Ukraine means that the potential impact for commodity markets would be more limited, although the uncertainty would still likely be bullish in the short term. There would still be a risk to Russian gas flows via Ukraine to Europe. While, depending on the scale of any invasion, it could also potentially have an impact on the production and export of Ukrainian agricultural commodities, including corn and wheat.

However, in a scenario where the West reacts strongly with sanctions that target key Russian industries, this could have a far-reaching impact on the commodities complex. It could potentially lead to a significant tightening in energy, metal, and agri markets, which would provide only a further boost to an asset class which already has an abundance of positive sentiment in it.

Even if sanctions are not imposed on certain industries, financial sanctions could still make trade difficult, as it would be an obstacle for making payments.

The European natural gas market is most vulnerable. The region is already dealing with an extremely tight market. Therefore, any further reduction in Russian gas flows to the region would leave the European market exposed. Russia is the dominant supplier of natural gas to Europe, with it usually making up anywhere between 40-50% of European gas imports.

Sanctions would also be a risk for the oil market. Russia is the second-largest crude oil exporter after Saudi Arabia, with crude and condensate volumes averaging in the region of 5 million barrels per day. Any potential action taken, which impacts a large share of these exports, would likely push the global market into deficit and would be extremely bullish for oil. Sanctions could also possibly have an impact on output from European aluminium smelters. Russia is a sizeable producer of nickel, copper, palladium and platinum. Therefore, some of these markets could also tighten up significantly.

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