In today’s world the pervasiveness of the media tends to add hype to geopolitical situations. This is not to take from the seriousness of the current Ukrainian crises. More so it is to highlight how rapidly global opinions are formed and then reversed. This morning’s cessation of military exercises by the Russians on the Ukrainian border was not a dramatic turn in events, rather it was natural completion of a scheduled week long exercise. Tell that to the markets.
Tensions remain in the region of that there is no doubt. As discussed yesterday, the threat to the European supply of Oil and Natural Gas is real. Yesterday’s troop withdrawal however has offered some relief, to Oil anyway, West Texas Crude dropped just over 1% to $103.84 per barrel while Brent Crude fell 1.25% to $109.82 per barrel.
Natural Gas prices remain at their highs, for two reasons. Firstly, 3 of the 5 westward flowing Natural Gas pipelines from Russia route through the Ukraine and this supply remains vulnerable to regional developments. Secondly, Russia is playing a new card in the evolving Ukrainian situation. The Russian Government controlled Natural Gas company, Gazprom, has just cancelled a negotiated Gas price discount with the Ukraine. This effectively raises the price at which Natural Gas arrives in the Ukraine. The Natural Gas discount was part of a $15bn ‘incentive’ package offered by Russia to the Ukraine in exchange for cutting ties with the European Union. As this is now in dispute, Russia feels that the discount should no longer be on the table until such a time as there is a resolution to the Ukrainian crises, no doubt a Resolution favorable to Russia.
Beyond the energy disruption troubles being created by this geopolitical state of affairs, an impending food input crises also weighs. Russia and the Ukraine combined account for 17% of the world’s wheat production, while the Ukraine alone produces 16% of the world’s corn. Both of these agricultural commodities jumped over 5% yesterday and whereas some pullback is in evidence this morning this is slight, and the price of these essential food inputs remains elevated. Compounding the problem of potential disruption is the fact that the farmers will likely also face higher costs of production through higher energy cost prices.
To contact the reporter of this story: James Brennan at firstname.lastname@example.org