Geopolitical twists & turns to continue to drive prices

It was a rollercoaster week for many commodities as tensions between Russia and the West over Ukraine ebbed and flowed and the West held talks with Iran over a new nuclear deal. In the end, it was signs of progress in the Iran talks that pushed oil prices lower by the end of the week. The fall in European natural gas prices was perhaps more of a surprise given Europe’s reliance on Russian exports, but a combination of sizeable LNG imports and a surge in wind power generation has fuelled a rise in stocks and made Europe look a little less vulnerable to supply shocks. The ongoing situation surrounding Ukraine will remain a key driver of investor sentiment and prices next week. Were Russia to invade Ukraine, the prices of all energy and some metals and agricultural commodities would inevitably surge. However, we suspect that neither the West or Russia has much appetite for curtailing the trade in energy, and that prices could fall back fairly swiftly. By contrast, the West has sanctioned Russia’s metal producers before and, with most of Russia’s grain exports leaving from Black Sea ports, the risk of supply disruption there is high. Either way, we think that, until an agreement is reached, the risk premia in prices will remain elevated.