From Russia with Love

August 5, 2014

As written for CQG

From Russia with Love

How might the latest tensions impact commodity prices?

Increasing tensions between the West and Russia surrounding Ukraine could impact some commodity prices. Physical flows of these commodities could be interrupted, or pre-sanction dumping may occur. As a major producer of certain natural resources, Russia depends on cash flow from selling these commodities. Let’s take a look at some of these commodities in order to understand the potential.

Nickel

Nickel prices have rallied in 2014 based, in part, on a new government policy in Indonesia that banned or severely restricted mineral ore exports. Russia is a major producer and exporter of nickel. In fact, MMC Norilsk Nickel is the world’s largest producer of the metal.

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The weekly nickel chart illustrates that in 2014 the price of nickel moved from under $14,000 per ton to a high of just under $22,000 – an increase of 57% in less than six months. Since the highs in April, the price of nickel has pulled back to the $18,600 level. Could the Russians be selling nickel to raise cash?

Palladium

The two major producers of palladium in the world are Russia and South Africa. In South Africa, a strike that lasted four months caused the price of platinum and palladium to move higher. Russia actually produces more palladium than South Africa. In Russia, palladium production is a byproduct of nickel production.

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Palladium rallied from $731.20 per ounce at the beginning of 2014, to a high of $890 on July 14, an increase of 22%, before falling to its current price of $855. Could the Russians be selling palladium to raise cash?

Crude Oil

Russia is a major producer and exporter of crude oil and natural gas. Western Europe has grown to depend on Russian oil and gas.

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The price of crude oil (WTI) began 2014 at $94.18 per barrel. Crude rallied to a high of $107.73 in June before falling back to its current level of around $98 per barrel. Many of the proposed sanctions on Russia are aimed at its energy sector. While Western Europe depends on Russian energy, the US has significant reserves of crude oil. The current level of the US Strategic Petroleum Reserve is approximately 700 million barrels. These reserves could be made available in cases of shortages and could, in fact, be an economic weapon against the current Russian leadership. A lower crude oil price would lower Russian oil revenue cash flow.

Wheat

The price of wheat has been volatile thus far in 2014. Wheat started the year at $6.08 per bushel. It moved up to a high of $7.35 on May 5 before plummeting to the current price of $5.46. Since May 5, wheat has gone down more than 25%.

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The price of wheat depends on growing conditions and weather in producing areas. Russia and Ukraine are both significant wheat producers. Lately, in the physical market, there has been plenty of Black Sea wheat available for purchase. Are the Russians dumping wheat on the market?

The Bottom Line

Nickel, palladium, crude oil, and wheat are all important commodities for the Russian economy. The current environment of sanctions and harsh words between Russia and the US and Western Europe will most likely result in continued volatility in these commodities that Russia (and the rest of the world) depends on. Let’s not forget all of the investments that the US and European companies have made in Russian natural resources over the past two decades. Sanctions could certainly cause financial pain for those companies with Russian exposure.

Keep your eyes focused on Russia and these commodities. Opportunities will certainly present themselves as the current geopolitical environment remains dynamic. Commodity prices and flows that usually depend on fundamental and technical market action can be dramatically affected by geopolitical events.

CQG Article: From Russia with Love


 

Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities.

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