Tensions between Russia and Ukraine are rising, and traders have not yet fully acknowledged the risks a conflict would pose to the commodity market, particularly natural gas, wheat and maize.
A potential conflict could increase the possibility of disruptions in commodity flows, says Warren Patterson, head of commodity strategy at ING. The US and the EU can also react in the event of a conflict, leading to sanctions against Russia, which could have an “impact on the supply of a number of raw materials to world markets,” he says – and none of these factors are priced at the market.
Traders from the United States and Russia recently held talks on tensions over Ukraine amid Russia’s military build-up along its border. That the discussions showed little progress. The United States and its allies have been looking at economic sanctions against Russia if Moscow sends troops across the Ukrainian border.
Natural gas is among the raw materials that will most likely see an impact if the situation intensifies, Patterson says. “Ukraine is a major transit route for Russian flows to Europe”, and Russia is a key supplier of natural gas to the EU, meeting almost 50% of the region’s import demand, he says.
Natural gas prices rose last year as higher global demand from hot summer weather and lower energy production from wind turbines contributed to a sharp decline in fuel supplies.
Europe is dependent on Russian gas transiting through Ukraine, and especially since 2022 has started with record low European gas reserves, where Germany has not yet approved or certified flows through “Russia’s alternative route”, the now complete Nord Stream 2 pipeline, says James Huckstepp, Head of EMEA Gas Analysis at S&P Global Platts. Months European benchmark TTF prices for natural gas are trading at more than four times their five-year average, he says, and have been volatile in recent months.
February Dutch TTF gas futures traded at 75.90 euros (86.86 USD) per. megawatt-hour on January 12th. Contract prices recently peaked at close to € 180 in December, but were around € 18.62 a year ago. Platts Analytics expects that flows through Ukraine will continue and that prices will fall significantly after Nord Stream 2 is certified in the third quarter of this year, Huckstepp says.
But the recent rise in tensions at the Ukrainian border puts the pipeline at risk of further delay or direct cancellation, which would lead to “extreme prices and volatility continuing into 2023,” he says. To measure the risk of future Russian flows, traders need to see not only what is happening in Russia, Ukraine and Europe, but also Washington, where renewed sanctions against Nord Stream 2 are still on the table.
A potential conflict between Russia and Ukraine could also leave the wheat and maize markets vulnerable, as both are significant suppliers of these raw materials, says ING’s Patterson.
Ukraine is expected to export over 24 million tons of wheat in the current production year, which accounts for almost 12% of total global exports, says Peter Meyer, head of grain and oilseed analysis at S&P Global Platts. The country’s maize exports, meanwhile, are expected to reach 32.5 million tonnes, or almost 16% of global exports, he says.
Corn and wheat prices rose in the spring of 2014 when Russia invaded Crimea, Meyer says. Ukraine’s market share of global maize exports has remained roughly the same as eight years ago. But total corn exports have increased by 62.5% since then, he says, and its export market share for wheat has also almost doubled.
“Any disruption in Black Sea ports could prove to be a market movement if the conflict escalates,” Meyer says, but so far “it is business as usual despite rising tensions.”
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