European gas prices rose by as much as a third on Tuesday after Russia warned it could cut off supplies to the region in response to western sanctions over its invasion of Ukraine.
Futures contracts linked to TTF, the European wholesale gas price, surged by 33 per cent on Tuesday morning to €285 per megawatt hour before trimming some gains to trade 9 per cent higher at €235. A year ago, these contracts traded at about €16.
Prices of wheat and nickel also hit record highs as Russian forces intensified their shelling of Ukrainian cities and moved closer to the southern port of Odesa, although European equities moved higher after days of heavy losses.
Embargo
Russian deputy prime minister Alexander Novak said the nation, which supplies 40 per cent of Europe’s gas, had “every right” to “impose an embargo on gas pumping” in retaliation for Germany having frozen approvals of the Kremlin-backed Nordstream 2 pipeline. In comments on Russian state television late on Monday, Novak also said plans by the US and Europe to consider banning Russian oil imports could send the price of Brent crude up to $300 (€275) a barrel.
“Given Russia’s key role in global energy supply, the global economy could soon be faced with one of the largest energy supply shocks ever,” Damien Courvalin, head of energy research at Goldman Sachs, said in a note to clients - adding that “the uncertainty on how this conflict and oil shortages will be resolved is unprecedented.”
Brent crude oil, which rose as high as $139 a barrel on Monday after US secretary of state Antony Blinken said Washington was in “very active discussions” with European allies over a ban on Russian oil, traded at $126.16 on Tuesday morning.
The Stoxx 600 share index, which had lost almost 7 per cent in the past three trading days, rose 1.1 per cent in early dealings. Germany’s Xetra Dax share index rose 1.2 per cent, after falling more than 11 per cent during March so far.
European shares have tumbled since Russian President Vladimir Putin launched his invasion of Ukraine – not only because of fears of consumer price inflation caused by higher energy prices, but also because of concerns about the economic implications of potential industry shutdowns caused by shortages of commodities produced in Russia and Ukraine.
“It is not just inflation the market is panicking about, but war-flation,” said Hani Redha, multi-asset fund manager at PineBridge Investments. “What we’re starting to price is recession risk due to shortages” he added.
“It’s not just about resources becoming more expensive to get hold of, but the disruption to supply caused by geopolitical events.”
Wheat
Wheat futures rose as much as 5.4 per cent to $13.63 a bushel in early trading on Tuesday before pulling back to be up about 0.6 per cent at $13.02. Ukraine and Russia account for almost a third of global wheat exports.
The benchmark nickel contract surged to a record high above $100,000 a tonne on the London Metal Exchange, prompting the venue to halt trading as the “evolving situation in Russia and Ukraine” shakes up commodities markets.
Caroline Bain, chief commodities economist at consultancy Capital Economics, said blocking Russian energy exports would push Brent to about $160 a barrel and “energy prices would stay higher for longer as it would take time for supply to pick up to fill the shortfall”, she added.
Asia equity markets were mostly lower, with China’s benchmark CSI 300 index down 0.7 per cent and Japan’s Topix falling 1.9 per cent. – Copyright The Financial Times Limited 2022
