Looking Into Future Commodity Prices under Russia-Ukraine Conflicts with Three Different Prospects

SHANGHAI, Apr 7 - How will Russia-Ukraine conflict impact commodity trends? Southwest Securities issued an overseas market research report, saying that under the neutral scenario, the market will react similarly to the Crimea crisis in 2014, but the actual situation may be more severe. Crude oil prices are high, with duration depending on when Russia and Ukraine make substantial progress. Given that LME nickel has risen by a maximum of 132.7% during the year, and LME aluminium has risen by 41.5% from the beginning of the year, the overall impact of the future progress concerning Russian-Ukraine conflicts on raw materials is not significant. Gold prices, on the other hand, drop after hitting high with marginal subsiding risk aversion sentiment.

Three prospects on the future course of the Russia-Ukraine conflict

In optimistic scenario, if Russian-Ukrainian conflict ends briefly, with less Western intervention and no more casualties, it may be similar to the 2008 Russo-Georgian war, but the odds is low;

In neutral scenario, if Russia and Ukraine stop the large-scale military conflict, but the United States and other Western countries continue to increase economic sanctions, the future of the Russian-Ukrainian conflict may evolve into the Crimea crisis in 2014, but the actual situation may be more serious;

In the pessimistic scenario, if the US and other NATO countries continue to get involved into the war and adopt comprehensive economic sanctions, the casualties continue to rise and the situation may deteriorate to that of the Gulf War in 1990, but the probability of this is low.

The impact of geopolitical conflicts on commodity price volatility from three aspects

In terms of energy, the Russian-Georgian war did not change the original trend of oil prices much. The highest increase in oil prices during the Crimean crisis was about 10% and the prices stood high for about 6 months, while oil prices rose by more than 140% during the Gulf War, but only lasted for about 3 months.

In terms of raw materials, during the Russian-Georgian war, nickel and tin prices rose 21.0% and 23.7% respectively, but lasted less than 1 month; during the Crimean crisis, nickel recorded a maximum rise of more than 45%, and stood high for 4 months; the Gulf War pulled up the prices of industrial raw materials and CRB index by 10.6% and 26.1% respectively, and the rise lasted 3 months.

For gold, under the Russian-Georgian war, gold prices rose by more than 10%, and the upward cycle lasted for about 1 month; during the Crimean crisis, gold prices rose by about 13.0%, and then fell; and in the Gulf War period, gold prices reached a maximum increase of 19.1% with great volatility.

The impact of Russia-Ukraine conflicts on commodity price volatility from three aspects

Energy: In optimistic scenario, international crude oil prices may be in a downward trend under the influence of supply, demand and currency factors; in neutral scenario, crude oil prices will be high, and the duration depends on when Russia and Ukraine make substantial progress; in pessimistic scenario, crude oil prices are expected to continue to soar, up over 140% from the beginning of the year to a high of US$180/barrel, and the duration is also related to other sources of supply. European gas supplies may become even tighter, with prices depending on the recovery of Russian supplies.

Raw materials: LME nickel has risen by a maximum of 132.7% during the year, LME aluminium has risen by 41.5% compared to the beginning of the year. In optimistic or neutral scenario, the overall impact on raw materials is not significant, but some product prices will be affected to a greater extent; in pessimistic scenario, industrial raw materials and metal prices will be driven up sharply by the continued rise in fuel prices.

Precious metals: Gold prices have risen by a maximum of about 14.0% during the year. In optimistic scenario, gold prices may continue to drop; in medium scenario, gold prices will drop from high with marginally subsiding risk aversion sentiment; in pessimistic scenario, the prices will continue to soar with greater volatility.