Energy prices rose sharply during Thursday as markets started adjusting to the risk and uncertainty of all-out Russian aggression in Ukraine and its potential spill-over. Despite warnings, particularly from US President Joe Biden, that an all-out war was likely many markets had failed to price in the risk sufficiently in the days ahead. The oil market, with most experience of valuing geopolitical risk had anticipated the risk best, while equity markets went through more panicky movements. With the European Security Order now officially defunct – it had been kept on life support by Western countries since Russia’s annexation of Crimea in 2014 – the mix of science and art behind risk premiums will have to be rediscovered in many markets, beside commodities.
The difference in risk premiums assigned in energy markets, however, sheds light over what fallout the war could bring. European natural gas prices rose around 50% at the Dutch TTF hub, meaning a total shut-down of Russian gas exports in the coming days has been almost entirely priced in. A statement by Gazprom that gas exports to Poland and gas transit further west was halved today clearly spurred the market to price in a larger shut-in than just of volumes transited over Ukraine. Nevertheless towards the end of the day risks were assessed as lower following G7-leaders’ pledge to safeguard energy flows from sanction-impact.
Oil markets also bounced up on fears that financial sanctions against Russia would make paying for port services and securing insurance hard, creating obstacles for oil trade. News during the trading day that a few ship owners held off allowing their tankers into Russian terminals until the extent of financial sanctions was clarified underscored this. Comments by President Biden as well as statements together with the other G7 leaders removed most of those fears before the end of trading, however. As a consequence, ICE Brent crude futures closed just below US$100/bbl.
Diesel and petrol (gasoline) prices in Europe did not fall back towards the end of the day like crude did. Fears crude volumes through the southern leg of Russia’s Druzhba pipeline, which passes through Ukraine, were going to stop, rose as the extent of the war became clear. The pipeline supplies several Central European refineries and while alternative supply can be arranged, logistical challenges are bound to push up fuel and fuel transport prices on the continent for a few weeks should this happen.
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