Oil prices: Ukraine crisis jolts energy markets

Oil prices spiked Monday on an unfolding crisis in Ukraine, while Russian stocks took a beating. Heightening tensions between Ukraine and Russia is reverberating through energy markets, making for volatile oil prices.

The brewing war in Ukraine has quickly reverberated through the markets, sending stocks down and commodities up. Tension heightened over the weekend with Russia’s move to send troops to Crimea in an effort to secure its strategically critical naval base in Sevastopol. The new Ukrainian government responded by putting its armed forces on “combat readiness.” What began as domestic unrest in Ukraine over former President Yanukovych’s coziness with Moscow is now rapidly escalating into not only a potential civil-war, but also a Russian invasion of Ukraine and a clash with the West.

With events quickly unfolding in real-time, global markets are reacting negatively. Russia itself is already paying the price – on March 3rd the Ruble dropped by 2.5% against the Dollar and 1.5% against the Euro, both all-time lows. Russian stocks also dived to their lowest level since the global financial crisis, with the Micex Index down 9.8%. Gazprom, which the Kremlin uses as its piggy bank, was down 10.7%. The Russian central bank was forced into action, raising interest rates from 5.5% to 7%. Yields for Russian government bonds increased to 8.84%, within 25 points of an all-time record. (Related Article: Can U.S. LNG Break Russia’s Gas Grip on Europe?)

The Obama administration has promised that there will be significant costs for Russia’s actions. But, the markets are already acting. Russia has inflicted an immediate economic cost upon itself – one that appears to be stronger and swifter than anything the Obama administration has thus far considered. 

Equities across the board took a hit on the rising tensions in Ukraine. During trading hours, the Down Jones was down almost 1%. The FTSE 100 Index dropped 1.43%. The German DAX lost over 3% and the Nikkei lost 1.27%.

Stocks are taking a beating, but investors are pouring money into commodities on the expectation that supplies could be cut off. Russia rounds out the top three oil producers in the world (along with the United States and Saudi Arabia), so the prospect of a Russian ground war in Ukraine is causing some serious jitters in oil markets. Crude oil (Brent) was up more than 2.2% to $111 per barrel in morning trading on March 3.

But it’s not just oil that is under the gun. As a major supplier of natural gas to Europe, natural gas prices are also soaring across Western Europe on fears of supply outages. In the U.K., next-month delivery prices for natural gas jumped by 10% on the ICE Futures Europe exchange in London, the biggest gain in more than two and a half years. Natural gas in the Netherlands also gained 10%, its largest ever increase. And gas prices in Germany were up 8.1%. (Related Article: There's no Easy Fix to Ukraine's Energy Dilemma)

Europe imports 34% of its natural gas imports from Russia via Ukraine. Supply fundamentals appear to be normal, and thus far there are no reports of disruptions. Citigroup says it does not believe supplies will be “materially affected,” as reported by Bloomberg. But the markets are not so convinced.

The conflict rippled beyond fossil fuels to other commodities as well. The Standard and Poor’s GSCI Index of 24 commodities increased by 2.1% during trading on March 3rd. Wheat surged by 5.11% and corn by over 2%. Gold was up 2.35%.

Whenever investors feel the heat from geopolitical risk, equities tend to take a hit, and commodities offer a safe-haven. The stock sell off and the rally in commodity markets could reverse course if the Ukrainian crisis eases, but as of this writing on March 3rd, it only appears to be deepening.