Sufficient Commodity Supplies Offset Geopolitical Pressure

Greater supplies of key commodities have prevented price surges over the brewing crisis in Crimea. Europe has an abnormally high supply of natural gas in storage, grain output is at record levels, and potential economic damage from the Ukrainian crisis are all contributing factors in moderating prices. Typically, heightened tension between big energy suppliers or conflict at the crossroads of energy infrastructure can lead to price spikes in everything from food to crude oil.

But this time, the prospect of economic warfare between Russia and the West has investors consider the chances that both sides will see their economies harmed. Stocks around the world lost a combined $1.4 trillion in value last week over concerns about Crimea. “This is basically a hydrocarbon version of Mutually Assured Destruction,” said Seth Kleinman of Citigroup, according to Bloomberg News. “Europe needs Russian energy and Russia needs Europe’s money.”

On the other hand, the markets may also be calculating that any response from the European Union will lack teeth. Economic sanctions may only target high level government figures or oligarchs, but won’t hit Russia’s oil and gas sector, for example. Russia’s Micex rallied on March 17 on the belief that any retaliation from the West will be mild.

Crude oil prices dropped on March 17. The WTI benchmark dipped below $100 per barrel, back in the range of where it was before the Ukrainian crisis. Brent crude fell by 1.5% to $106.60 in midday trading.

To be sure, commodities could surge if the situation worsens. As of now, stronger sanctions that target Russia’s energy are unlikely. But if the EU did make such a move, supply disruptions could become a significant concern. As of now, investors seem to be betting that the standoff between Russia and the West will not dramatically escalate.

By. Joao Peixe of Oilprice.com