Gold, oil soar on Russia-Ukraine conflict

Thursday (February 24) saw gold shoot up more than 4% from Wednesday, to $1 971, as conflict erupted between Ukraine and Russia over two breakaway provinces to the east of Ukraine.

Brent crude oil was up nearly 8% to $104.50 a barrel in response to news of the conflict.

Russian President Vladimir Putin earlier this week recognised the territorial integrity of the two separatist republics with majority ethnic Russians in Ukraine and deployed troops to the region.

Russian troops reportedly disembarked at the Black Sea port of Odessa in Ukraine.

Gold hit a 20-month high on news of the conflict, with gold bulls eyeing $3 000 an ounce as the next target.

Gold has traditionally performed well in times of geopolitical stress, and the latest move reaffirms that trend.

Also up over the last 24 hours are nickel, copper and zinc: three so-called ‘clean metals’ that are crucial to the green energy transition. Russia is a key supplier of nickel, which is up 25% since the start of the year. Aluminium is also up 20% since the start of the year. Wheat futures were up more than 5% on Thursday in anticipation of supply disruptions, as Russia and Ukraine account for an estimated 30% of the world’s wheat exports.

“It’s not just metals that are impacted by this conflict,” says David Shapiro, deputy chair of Sasfin Securities.

“Wheat and other food futures are also sharply higher in the last 24 hours, which is to be expected as Ukraine is a major producer of wheat and food for export to Europe.

“We don’t know how long this conflict is going to last but I don’t think it will be that long. What is clear is that these price increases are a knee-jerk reaction to the conflict, but we may see elevated prices for quite some time yet.

“What may be more crucial in the days and weeks ahead is how the [US] Federal Reserve responds to this. It will want to be very cautious in its response and not take any steps that may disrupt growth.”

JSE

The JSE was down 1.72% on Wednesday, with the rand-US dollar exchange rate weakening 1.28% to R15.34. Sasol’s share price closed 4.29% higher.

Terence Hove, financial analyst at Exness Africa, says we should brace ourselves for higher prices at the fuel pump for possibly several months.

“Russia is the third largest exporter of oil, mainly into Europe and Asia. Given global supply chain constraints coupled with a backlog on oil production to meet demand, that is likely to impact virtually all companies in terms of higher energy costs.

“The US and UK have already announced additional sanctions on Russia, and that will prove quite lethal, particularly as Russia’s oil customers may have to look elsewhere to meet their demand. There will be tough resistance to this from Russia’s biggest customers, given the impact this will have on their economies. This is especially true of strategic customers such as China.”

Though fuel inflationary pressures are intensifying, the decision by South Africa’s National Treasury to put a freeze on any increases in the fuel levy in the 2022 Budget should help soften any fuel price increases at the pump, adds Hove.

Opportunity beckons for US energy suppliers

Craig Morkel, spokesperson for the SA Oil And Gas Association, says a war in Ukraine would likely result in oil and gas exports and related finances being sanctioned by not only Nato (North Atlantic Trade Treaty Organisation) members, but also its allies elsewhere.

“This would likely leave Russia with mainly China as an oil and gas trading partner to whom oil and gas supplies that were originally intended for the EU would be diverted,” says Morkel.

He adds that Europe’s gas requirements, especially in Germany, will need additional supplies from US liquified natural gas (LNG) suppliers and members of the Gas Exporting Countries Forum (GECF).

“The GECF and Russia concluded an agreement in November 2021, which will now be put under pressure by the sanctions introduced by Nato members. This would likely drive up the cost of crude and refined oil and gas on the spot market, given the diversion or hoarding of fuel reserves to support a war in the Ukraine.”

Morkel says US and GECF member countries would likely be closing deals with Germany and other importers of Russia’s oil and gas on a spot basis to fill the immediate supply gap from Russia and would likely do so at a significant premium.