Commodity Wrap - Oil, Gold, Wheat, Natural Gas (22.02.2022)

Oil

• Russia recognized separatists' republics in Donbas. Russia sent a peacekeeper mission to the region, violating the officially recognized Ukrainian border. Separatists say they have claims to more Ukrainian land, what hints that conflict may just be beginning

• Let us recall, JP Morgan expects oil price to reach $120 per barrel in case Russia invades Ukraine while Citi expects a 10% price jump. Goldman Sachs expects a 7% jump compared to Friday's close - around $98 per barrel for Brent contract with April delivery.

• Brent for March delivery has touched $100 per barrel. However, this series is no longer liquid

• Let us recall, European Union imports around 3 mbpd of oil from Russia. It could potentially be replaced with deliveries from US and other OPEC countries. However, Russian oil can be more easily transported to European countries

• Iraq says there are no reasons to boost oil production yet. According to Iraq, market is in balance

Difference between price of Russian URALS oil and Brent oil widens. World is afraid of sanctions that will target main sources of Russian revenue - oil and natural gas. Source: Bloomberg

Russia accounts for around 3 mbpd of oil exports to EU countries. Source: EIA

Gold

• Gold price jumped on news of Russia recognizing new republics in eastern Ukraine. However, the price failed to break above $1,910. Gold price have later dropped below $1,895 as we are still awaiting sanctions announcement from the West

• ETFs have been buying large quantities of gold as of late and large number of long speculative positions was opened

• A big shift on the gold options market. Over the course of 2 weeks, out-of-the-money calls became more expensive than out-of-the-money puts (positive risk reversal)

ETFs were buying large quantities of gold while speculators increased bullish bets. Source: Bloomberg

Gold broke above the downward trendline. Gold has gained around 18% during the 2014 Ukraine crisis. Fed was also preparing to tighten policy back then so the situation looks similar. Price peaked oce Crimea Peninsula was annexed. Currently, it is unknown how much the conflict will escalate but sanctions are expected. Source: xStation5

Wheat

• Wheat prices have risen significantly over the past 3 weeks

• Price sits around 12.5% below all-time highs

• Russia nad Ukraine account for around 30% of global wheat exports

• Supply of wheat may be in danger if conflict escalates and ports at the Black Sea are blocked

• Wheat is oversold by speculators, what may lead to strong upward pressure in case investors' sentiment changes

Russia and Ukraine account for around 30% of global wheat exports. Source: USDA

Wheat prices rise but volatility has been limited so far this week. It should be noted that price rose significantly in 2014. Source: xStation5

Natural Gas

• Russia said that deliveries of natural gas will continue

• Ukrainian President calls for sanctions on Nord Stream 2

• German Chancellor Scholz said that Nord Stream 2 certification will be halted

• Natural gas prices at Dutch exchanges are rather calm

• European prices are still around 5 times higher than US prices

• European prices are also around 5 times higher than in year ago period

• European natural gas stockpiles are around 30% full, similar to 2016 or 2017

• Nevertheless, situation in Ukraine can impact natural gas prices in Europe, what may in turn impact prices of US commodity in case sanctions on Russian gas are levied

Prices in Europea are around 5 times higher than in the United States and around 5 times higher than in year ago period. Source: Bloomberg

European gas storage is around 30% full - low but at similar levels as in 2016 or 2017. Source: Bloomberg