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Commodities and defence companies in focus for investors during Ukraine crisis


Russia is in the process of defending its currency, the rouble, following announced sanctions over the weekend. The currency was down 30% pn Monday morning following projected asset freezes. The FTSE 100 in London was down about 73 points at lunchtime UK time, having recovered from a bigger drop at the open.

Lloyds Banking Group LSE:LLOY was down 3.5% during the morning, and shares in HSBC were off by 4.81%. Investors were piling into shares of BAE Systems [LSE:BAES], which were up over 14%. BP [LSE:BP] had lost 6% by lunchtime following the announced sale of its stake in Rosneft.

BP will feel financial pain as it exits the Rosneft stake with a huge write down expected, so it’s little surprise shares fell by 7% on the open. However, given the scale of the impairment charges expected, the reaction is pretty limited, illustrating that investors feel the reputational damage of continuing to do business with Russia could be more damaging long term.

“BP is leading the way by opening up a new channel of censure, with its course of action followed by Norway’s Equinor [Oslo:EQNR] which has also announced it’s divesting its smaller Russian joint operations,” said Susannah Streeter, Senior Markets Analyst at Hargreaves Lansdown.

More difficulties though are expected to come for Western companies, as the conflict is set to keep costs of crucial commodities elevated. Oil has again marched up above 101 dollars a barrel, up 3.5% while UK natural gas prices are also up by more than 3% to 272 pence a therm. With Russia targeting gas pipelines in Ukraine, supplies to Europe could face further disruption pushing up the costs on international exchanges.

Pressure on wheat supplies from Russia will be felt in futures

Disruptions to wheat and corn supplies around the Black Sea region are becoming worse as the fighting intensifies in Ukraine, with ports shut down and Russia facing increasing difficulties with exports. The two countries account for around 29% of global wheat exports, 19% of world corn supplies, and 80% of world sunflower oil exports.

Wheat contracts traded in Chicago are expected to surge today to levels not seen since 2012, with futures prices spiking by more than 8% earlier to $9.35 a bushel, while corn contracts rose by 5%. This will pile the pressure on food producers further, already grappling with higher transport and logistics costs.

Russia’s invasion of Ukraine has prompted fears of a disruption of oil and gas supplies to Europe that will send prices to new highs. In the short-term, the impact will hit consumers, further contributing to already-high inflation.

The long-term risks to energy supplies will depend on two factors: whether tighter sanctions are imposed by the US and EU, and whether Russia retaliates by deploying its own “energy weapon”: cutting off oil and gas exports to Europe.

Vladimir Putin has shown that he’s willing to take big gambles, but Eurasia Group’s top energy analyst Raad Alkadiri says that, at best, such a move would be a pyrrhic victory for the Russian president.

“Energy is a major source of revenue for the Kremlin, with oil and natural gas making up 40% of its budget receipts,” Alkadiri said. “For big companies such as Gazprom, breaking long-term contracts with the EU risks major legal liability and would further accelerate the bloc’s moves to decouple from its dependence on Russian gas.”

He added that on the oil side, interrupting physical supplies would force Russian companies to cede market share. If that happens, other producers — particularly OPEC leaders such as Saudi Arabia — would face increasing pressure to use their own spare capacity to fill the gap in Russian supplies.

Full suspension of energy supplies cannot be dismissed

“Nevertheless, the invasion of Ukraine demonstrates that Russian President Vladimir Putin is willing to take large gambles,” Alkadiri added. “Therefore, the possibility of a full suspension of oil and natural gas exports to the EU cannot be dismissed. If it does happen, the impact would be devastating, not just to those European economies dependent on Russian imports, but to the wider global economy as well.”

Cutting off all natural gas exports to Europe would lead to massive power shortages and sky-high prices that would drive the EU and UK economies into long-term recessions. Meanwhile, a suspension of Russian oil exports to Europe would immediately drive global prices well above $100 per barrel, and spur more global inflation.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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