Oil and gold steady as US and allies impose sanctions on Moscow

Crude prices tested the $100 a barrel mark on Wednesday after Russian President Vladimir Putin said troops would move into breakaway Ukrainian regions

Oil pump jacks in Bakersfield, California. Crude prices stabilised on Wednesday after rising a shade under $100 a barrel a day earlier. AP

Oil and gold prices stabilised while stock futures climbed after the US imposed sanctions on Russia but stopped short of taking aim at its energy industry.

Prospects of a breakthrough in nuclear talks with Iran also helped to ease market pressure.

Brent, the global benchmark for two thirds of the world's oil, traded 0.66 per cent lower at $96.20 a barrel at 2.34pm UAE time while West Texas Intermediate, the gauge that tracks US crude, fell 0.85 per cent to $91.13 a barrel.

The sanctions, described as part of a first tranche of measures against Moscow, were not as strong as some analysts had expected.

US stock futures and shares in Asia rose on Wednesday after the US and its allies, including Germany and the UK, sanctioned Russia, with Berlin suspending the opening of the Nord Stream 2 gas pipeline.

Brent surged to 50 cents shy of the $100 a barrel mark on Tuesday after Russian President Vladimir Putin recognised the Kremlin-backed separatist regions of Donetsk and Luhansk as republics and said he would send “peacekeeping forces” to protect them.

Calling Russia's decision an invasion, US President Joe Biden announced punitive measures against two Russian banks, the sale of the country’s sovereign debt abroad and some of Russia’s richest people.

“These sanctions look rather mild. It also seems that Washington does not intend to employ the full panoply of sanctions at its disposal,” said Charles-Henry Monchau, chief investment officer at Swiss-based Bank Syz.

“We do not see any reason to panic at this stage … we might actually get close to ‘peak fear’ on this crisis and there is a high probability that tensions will start to abate from here on.”

The softer-than-feared sanctions somewhat helped lift market sentiment, said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.

“The risk appetite is limited, of course, except in some key assets including oil and commodities,” she said.

Rising tension drove commodity prices, including wheat and nickel, higher on Tuesday.

Russia accounted for about 12 per cent of global crude oil exports in 2020 and about 10 per cent of total oil product exports, according to Emirates NBD.

It supplies 25 per cent of the world's natural gas exports and is also a major producer of industrial metals.

It is the third-largest source of mined nickel ore and a major supplier of palladium and aluminium to global markets. Russia also accounted for 17 per cent of global wheat exports between 2020 and 2021, and more than 10 per cent of grains such as barley.

European indexes recovered from early losses on Tuesday. However, US equities suffered heavier declines, with the S&P 500 closing 1 per cent lower at the end of trading, while the Nasdaq fell 1.2 per cent and the Dow Jones fell 1.4 per cent.

“Some of the risk-off sentiment that started the day abated through the session yesterday as greater clarity over the scope and scale of western sanctions against Russia became clearer,” said Khatija Haque, head of research and chief economist at Emirates NBD.

Despite US stocks recovering and markets in Asia higher on Wednesday, the risk of a shock to equities and commodities remains.

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“I have no doubt that Russia-Ukraine [conflict] still has the potential to deliver a stagflationary shock to the rest of the world if it escalates and oil prices spike to above $130 a barrel,” said Jeffrey Halley, senior market analyst, Asia Pacific at Oanda.

Despite lingering worries of supply disruptions, Opec+ ministers have pushed back against the idea of increasing output at a faster pace when they decide April output levels next week.

The International Energy Agency said it is monitoring with “growing concern” Russia's recent statements and actions, and their potential implications for energy markets.

The agency is consulting with member countries and key partners on “appropriate measures to ensure energy security".

“While the specific impact on world oil markets is yet to be determined, IEA member countries stand ready to act collectively to ensure that global oil markets are adequately supplied,” the IEA said on Wednesday.

Total oil stocks in IEA member countries stood close to 4.16 billion barrels at the end of last year, of which 1.5 billion barrels were held by governments as emergency reserves, it said. The agency said it is consulting its members on developments in the natural gas market.

The potential return of Iranian crude to global markets, although not imminent should a nuclear agreement be reached, has also helped to ease the surge in oil prices.

European and Russian negotiators have said talks to restore the Joint Comprehensive Plan of Action (JCPOA) have come to their “endgame” and could be concluded as early as this week.

While the US and Europe will impose sanctions on both Russia and the Moscow-backed regions, these sanctions look rather mild. It also seems that Washington does not intend to employ the full panoply of sanctions at its disposal

Charles Henry Monchau,
chief investment officer, Bank Syz

Iran, among larger Opec producers, will be able to boost exports by about 1 million barrels per day within a matter of months once sanctions are lifted.

Tehran has been exempt from the production cuts under the Opec+ agreement because its crude oil production remains limited by US sanctions.

The US Energy Information Administration estimates Iran’s production could return to full capacity, at 3.8 million bpd, if the US lifts sanctions on the oil sector.

Oil price volatility drove gold above $1,900 level on Tuesday as investors looked to safe-haven assets. Bullion, which is a hedge against inflationary pressures, was trading marginally lower at $1,897.18 an ounce on Wednesday.

Gold prices fell more than 4 per cent in 2021 after rising 48 per cent over the past two years as the global economic recovery reduced demand for the metal.

Gold has support at the $1,880 an ounce level and may test its resistance level at $2,000 an ounce as it is expected to continue rising amid geopolitical uncertainty, Oanda said.

Currency markets also recovered from an initial flight to safety on Tuesday.

“The softer than expected sanctions won the day and the US dollar gave back all its early session gains, with the euro and Australian and New Zealand dollars outperforming as arbiters of global risk sentiment,” Mr Halley said.

The dollar index finished 0.07 per cent lower at 96.07, where it remains in Asia trade on Wednesday, he said.

Bitcoin, the world’s biggest cryptocurrency also rose above the $38,000 mark, but “gains could be fragile as a further rise in geopolitical tensions could pull the price all the way down to the $30,000 level”, Ms Ozkardeskaya said.