Commodities prices were soaring across the board in Monday trading, as markets went into panic mode following the Russian military’s invasion of the Crimean Peninsula in neighboring Ukraine over the weekend.
The S&P GSCI Spot Index that tracks spot prices for 24 commodities lurched to gains of over 2 percent after the opening bell before paring back slightly, as the world waits to see just how far Russian president Vladimir Putin intends to go after he received parliamentary authorization over the weekend to use military force in order to restore order in its restive southwestern neighbor.
Commodities Surge On Fears of Supply Shortage
Overall, commodities prices surged to six-month highs on the day, with precious metals like gold, silver, and platinum up between one and two percent as a result of investors flocking to the traditional safe-havens. Agricultural commodities rose even higher, in particular corn and wheat, while both WTI and Brent crude futures contracts for April were trading nearly 2 percent higher.
The escalation of an ongoing crisis was interpreted as a signal that the military buildup that began last week on the Eastern side of the Russia-Ukraine border was no bluff on Putin’s part, and was bad news for equity markets in general, as the major US and world exchanges and indices headed sharply lower.
Precious metals stocks were a notable exception, rallying broadly on the combination of investor-uncertainty and higher spot prices. Also notable, however, was the opposite performance of oil and gas stocks, particularly the major vertically-integrated companies, many of whom have expended enormous effort on setting up shop in Russia‘s state-controlled energy sector.
Higher Prices for Crude, Lower Prices for "Big Oil" Stocks
ExxonMobil (XOM) was over one percent lower, and BP plc (BP) shed upwards of 2.5 percent by midday trading. California’s Chevron Corporation (CVX) , meanwhile, was off by half of a percent, with all three taking losses on heavy trading. Oil majors based on Europe’s mainland such as Italy’s Eni SPA (E) , France’s Total SA (TOT) , and Royal-Dutch Shell ($RDS.B) fared at least as poorly.
State-operated oil majors were also struggling, with Chinese giants PetroChina ($PTR) and China Petroleum & Chemical Corp. ($SNP) off by 1 percent and 1.6 percent respectively, while South American national supermajors were hit the hardest, in particular Argentina’s YPF S.A. (YPF) down over 2 percent and Petrobras Argentina SA (PZE) off nearly 6 percent. Both Colombian and Brazilian majors were also trading substantially lower on the day.
The last geopolitically-inspired onrush into commodities markets was prompted by a military coup that saw the ouster of Egypt’s democratically elected president Mohammed Morsi, but the past weekend’s developments in Eastern Europe are of much broader consequence to the global economy. The Egyptian-owned and operated Suez Canal sees just under 10 percent of the world’s energy supplies passing through its waters, and has been troubled relatively little since political events in the most populous Arab nation broke with decades of precedent in 2011. But Russia is the world’s largest exporter of oil and natural gas, and provides about 30 percent of European energy needs, half of which is piped through Ukraine.
European Energy Needs
Despite the deteriorating situation which has resulted in, among other things, the EU’s call for sanctions against its eastern neighbor, for the time being there at least seems to be a mutual interest in maintaining both the Westward flow of Russian energy and the Eastward flow of Euros. But whatever response ends up emerging from the international community, it will likely be formulated with no small consideration for precedent.
Indeed, in 2009, the governments of Western Europe experienced a harsh winter that was significantly aggravated when a prior dispute between Russia and Ukraine prompted the former to cut off energy supplies. All the same, this winter season has been unusually kind to Western Europe, resulting in unprecedented energy stockpiles of some 20 percent above the norm, and Russia is presumably not eager to see any reductions to a vital source of revenue.
National Interests and Defense May Trump Investment from Oil & Gas Majors
Oil and gas majors, whose struggles to keep up production in recent times are already a common industry-theme, for their part can only anxiously await the best possible outcome due to their Russian operations. Companies like Chevron and ExxonMobil have invested many years and great deal of financial and diplomatic resources into exploration and production in the former Soviet Union, and stand to lose a great deal of money and product if political and strategic considerations end up superceeding their ability to operate in the country.
Despite its need for the investment and experience that can be gained from tolerating the presence of Western supermajors on its soil, Russia’s oil and gas infrastructure has all the same managed well enough to make the nation the world’s top exporter, and has provided a dependable and enormous source of income for the state. Its naval base in the Ukrainian city of Sevastopol, on the other hand, is an irreplaceable geostrategic asset, as it houses Russia’s Black Sea Fleet and provides for a vital organ of the nation's ability to project power in the caucasus, Southeastern Europe, and the Middle East.
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