Ukraine Invasion Adds Major Risk Premium to Commodities

Ukraine Invasion Adds Major Risk Premium to Commodities

Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Russian military action on Ukrainian soil, the worst escalation of violence in Europe since the end of World War II, sent crude oil and natural gas prices to new highs on Thursday, even as the flow of products continues to avoid direct fire.

Brent crude oil, the global benchmark for the price of oil, topped the psychological threshold of $100 per barrel in overnight trading, but lost some traction early in the Thursday session. European natural gas prices, meanwhile, are back in the triple-digit range, with the regional Dutch TTF benchmark up some 20% on the day to trade in the $120-per-megawatt range.

Washington and its European allies vowed to respond with tough sanctions, while NATO allies are convening a special, and relatively rare, Article 4 session to consider what member states on the bloc's eastern flank see as pressing national security concerns.

On Wednesday, Western officials targeted the Nord Stream 2 natural gas pipeline running from Russia through the Baltic Sea to Germany, but cautioned that directing more pressure on Russian energy supplies would pose a threat to the global economy.

Russia has a unique and highly influential role in the global energy sector. It's one of Europe's main natural gas suppliers and sends a good deal of crude oil and refined petroleum products to the U.S. It also holds tacit control over crude oil prices as a pivotal member of OPEC+, a group of the core members of the Organization of the Petroleum Exporting Countries and non-member state allies working to control market volatility through coordinated guidance on output.

By Tuesday, the International Energy Agency, a Western-backed organization, said it was already watching the situation in Ukraine with "growing concern." At stake for the IEA is the 250,000 barrels of crude oil per day running through Ukraine via the Druzhba crude oil pipeline.

The IEA estimates member states have about 1.5 billion barrels of oil stocked in strategic reserves that could be released should market conditions worsen.

"The IEA will continue to monitor the market closely and assess the need for activating its emergency oil system," it said in the Tuesday statement.

Higher crude oil prices may eventually be their own undoing, however, should U.S. shale or other major producers find incentive to open the spigot. Talk of an imminent breakthrough in Iranian nuclear negotiations, meanwhile, could see another 1 million barrels per day or so on the market in short order.

But the threat of sanctions could thwart some flow of fossil fuels if tankers are wary of the potential for financial blowback. Shipping lanes in the region could also be impacted by the conflict. Neither situation alleviates the lingering supply-side pressures that have helped Brent jump some 30% so far this year, nor do they erase the geopolitical risk premium supporting broader commodities.

"Even if prices drop back below $100 per barrel due to abating tension in Eastern Europe, the retracement might prove short-lived and product tightness could keep oil prices at elevated levels in months to come," said Tamas Varga, an analyst at London oil broker PVM.

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