Tags: Commodity | Prices | Crimea | Crisis

Commodity Prices Cushioned From Crimea Crisis by Ample Supplies

Sunday, 16 March 2014 12:39 PM

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 5.1 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 0.5 percent. After wheat advanced 14 percent and corn 4.9 percent, both are still at least 26 percent below the peaks in 2010, the last time Russia and Ukraine curbed shipments. Gold reached a six-month high on March 14 as demand for a haven grew.

Abundant supply is limiting some price swings caused by Russia’s incursion into Crimea, where voters are deciding whether to secede from Ukraine. Europe gets about a third of its gas from Russia, half of which transits through Ukraine, and about the same proportion of its crude. Russia’s economy has slowed for three consecutive 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.

Underutilized Pipe

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 only 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, closed at 59.02 pence a therm on March 14, from 56.15 pence at the end of February. Futures have given up about 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 telephone on Friday. The exception would be if “the EU imposes sanctions on the energy sector, which is rather unlikely,” he said.

Pipelines Normal

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, closed at $108.57 a barrel on Friday on ICE Futures Europe, from $109.07 at the end of last month. Prices jumped 2 percent on March 3 and gave up all the gains within two days.

Exit polls released Sunday indicated that Crimeans voted overwhelmingly in favor of seceding from Ukraine and joining Russia .

Threatening Sanctions

The Ukrainian government in Kiev, the European Union and the U.S. consider the referendum illegal. The EU and the U.S. are threatening sanctions against Russia if it doesn’t pull back. The Kiev government said March 15 that Russian troops entered the Kherson region on the Azov Sea from the Crimea peninsula they already occupy.

“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, said Tom James, the Dubai-based managing director of Navitas Resources, a consultant.

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 4.3 percent this month, touching a six-month high of $1,388.40 an ounce on March 14. Hedge funds are holding the most-bullish bets on gold since December 2012, U.S. Commodity Futures Trading Commission data show.

Corn Shipper

Grain markets also rallied. Ukraine is the world’s sixth-biggest wheat exporter, after the U.S., EU, Canada, Australia and Russia. It is 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 15 percent in 2014 and touched a six-month high on March 7. Speculators are the most-bullish on prices since December 2012.

Crimea Port

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 north west of Crimea. The terminal handled about 43.4 million metric tons of cargo last year, including petroleum, 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 Friday. “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 closed at $6.8725 a bushel on March 14. 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 ended last week at $4.86, 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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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.
Sunday, 16 March 2014 12:39 PM
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