Unprecedented natural gas reserves in Europe, record global grain output and the threat of mutual economic calamity from oil sanctions are cushioning commodity prices even as the Ukraine-Russia conflict spurs a gold rally.
While U.K. gas prices, a European benchmark, rose 3.8 percent since the crisis began at the end of February, they are still the lowest for this time of year since 2010. Brent crude fell 2.3 percent. After wheat advanced 13 percent and corn 4.3 percent, both remain about a quarter below the peaks in 2010, the last time Russia and Ukraine curbed shipments. Gold reached a six-month high today as demand for a haven grew.
Abundant supply is limiting some price swings caused by Russia’s incursion into Crimea, where a majority in a disputed vote yesterday chose to join Russia, preliminary results show. Europe gets about a third of its gas from Russia, half of it through Ukraine, and about the same proportion of crude. Russia’s economy has slowed for three years, increasing its reliance on the export revenue. Sanction talks in Europe have focused on asset freezes and visa bans rather than energy.
“This is basically a hydrocarbon version of Mutually Assured Destruction,” said Seth Kleinman, Citigroup Inc.’s London-based head of energy research. “Europe needs Russian energy and Russia needs Europe’s money.”
Supplies of Russian gas transiting through Ukraine into Europe were interrupted in 2006 and 2009 because of disputes over prices and terms of supply. On both occasions, temperatures were freezing. Europe is now having its mildest winter since 2007 and stockpiles were about 45 percent full on March 13, up from 34 percent a year earlier, according to Gas Infrastructure Europe, the Brussels-based lobby group.
OAO Gazprom, Russia’s gas-pipeline export monopoly, has built Nord Stream, a conduit to Germany via the Baltic Sea that bypasses Ukraine. The pipeline is about 30 percent utilized, UBS AG analysts wrote in a report this month.
U.K. gas for next month, the European Union’s benchmark contract traded on ICE Futures Europe, declined 1.3 percent to 58.25 pence a therm at 4 p.m. in London, up from 56.15 pence at the end of February. Futures have given up more than half the gains they made on March 3, the first day of trading after the incursion.
“Since everybody expects the vote in favor of Russia, in that case the price impact should be limited,” Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt, said by phone on March 14. The exception would be if “the EU imposes sanctions on the energy sector, which is rather unlikely,” he said.
Gas and oil pipelines crossing Ukraine have operated normally since the incursion, according to officials from Gazprom and OAO Transneft, Russia’s oil-pipeline operator. Russian crude flows through Ukraine via the southern branch of the Druzhba pipeline, which carried about 300,000 barrels a day last year, according to data from Ukraine’s energy ministry.
That’s a fraction of the 3.05 million barrels of crude and 1.02 million barrels of refined-oil products that Russia exported daily to Europe last year, data from the Paris-based International Energy Agency show.
Brent crude, Europe’s benchmark grade, declined 1.9 percent today to $106.56 a barrel on ICE Futures Europe, from $109.07 at the end of last month. Prices surged 2 percent on March 3 and gave up all the gains within two days.
A total of 96.8 percent in the Crimean vote chose to leave Ukraine and become part of Russia, the head of the election commission, Mikhail Malyshev, told reporters.
The Ukrainian government, the EU and the U.S. consider the referendum illegal. The West is threatening sanctions against Russia if it doesn’t pull back. Russian troops entered the Kherson region on the Azov Sea from the Crimea peninsula they already occupy, the government in Kiev said March 15.
“If it goes Russia’s way and if Europe starts implementing sanctions, then we would be on our way up and up again” in energy prices, Tom James, the Dubai-based managing director of Navitas Resources, said before exit polls.
An escalating conflict hasn’t been ruled out by investors yet. Gold, viewed by some as a haven in times of turmoil, rose 15 percent this year on the Comex in New York. Prices gained 4.4 percent this month, touching a six-month high of $1,392.60 an ounce today. Hedge funds are the most bullish on gold since December 2012, U.S. Commodity Futures Trading Commission data show.
Grain markets also rallied. Ukraine is the world’s biggest wheat exporter after the U.S., EU, Canada, Australia and Russia. It’s the third-biggest shipper of corn and the top supplier of sunflower oil, according to the U.S. Department of Agriculture. The EU gets more corn, wheat and rapeseed from Ukraine than any other source, European Commission data show.
Chicago wheat futures are poised for their biggest quarterly gain since the end of September in 2012. Hedge funds that were betting on lower prices since early November turned bullish for the first time last week, CFTC data show. Corn futures that tumbled 40 percent last year are up 13 percent in 2014 and reached a six-month high on March 7. Speculators are the most bullish on prices since December 2012.
The trade in energy between Russia and Europe is too important to both sides to make a prolonged disruption likely, said Nigel Prentis, the head of consultancy at Hartland Shipping Services Ltd. in London.
Ukraine’s biggest port is Yuzhniy, near Odessa to the northwest of Crimea. The terminal handled about 43.4 million metric tons of cargo last year, including oil, coal and grain, according to data from the Ukrainian Sea Ports Authority. Elena Giryaeva, a spokeswoman for the authority, said March 16 that all the country’s ports were working normally.
The referendum in Crimea shouldn’t “have any impact at all,” Hartland’s Prentis said by phone March 14. “Russia needs to export its gas, and Europe needs to buy it. Ukraine needs to export wheat. These trades will continue.”
Wheat futures on the Chicago Board of Trade fell 0.8 percent to $6.815 a bushel as of 11:04 a.m. local time. While that’s up from $6.0225 at the end of February, prices rose as high as $8.68 in 2010 when Russia and Ukraine curbed shipments because of droughts. Corn futures on the CBOT fell 0.5 percent to $4.835 a bushel, compared with $4.635 on Feb. 28 and as much as $6.30 in 2010.
Global wheat output in the year that ends in June, before this year’s harvest in the Northern Hemisphere, will advance 8.6 percent to a record 712.7 million tons, while corn production will gain 12 percent to an all-time high of 967.5 million tons, the USDA estimates. Ukraine has already exported most of its grain from the 2013 harvest, and the planting of the next crop is just beginning, said Sergey Feofilov, the general director of UkrAgroConsult, a research company in Kiev.
“The ports in Crimea aren’t responsible for very much of the grain exports at all,” said Fiona Boal, a senior analyst at Hermes Fund Managers in London, which manages about $1.7 billion of assets. “It’s the ports in the west that are most important, and they seem to be operating as normal.”
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