Energy Prospectus

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Mon, Feb 28, 2022 9:38 AM m.
(Bloomberg) -- The turmoil sparked in commodity markets by the Russian invasion of Ukraine worsened Monday as LNG orders halted, funding for commodity trade dried up and sales of sea wheat froze.

As tougher sanctions from the United States and Europe threaten to partially isolate Russia from the global financial system, disruptions to shipments of commodities from palladium to wheat are mounting. In addition, buyers have halted purchases of Russian liquefied natural gas while awaiting clarity on restrictions against banks and companies. The cost of shipping the nation's raw materials is soaring, while fallout is reverberating from London to Hong Kong as international investors dump Russian commodity assets.

The immediate focus is on the disruption of trade in the Black Sea, which includes millions of barrels of oil per day and roughly a quarter of the world's grain exports. While Russian commodities have hitherto been exempt from sanctions, the threat of serious disruption to flows will increase as the conflict intensifies.

“The unintended consequential risk, that is, a pipeline outage or something like that, is extraordinarily high, and this adds to the difficulty of getting maritime trade off the ground,” said Jeff Currie, head of commodity research at Goldman. Sachs Group Inc., in an interview with Bloomberg TV. "This is a huge amount of oil that has the potential to be shut down for weeks."

Even before the expulsion of some Russian banks from the SWIFT messaging system – used for trillions of dollars worth of transactions around the world – several lenders were already suspending commodity trade finance from Russia.

Société Générale SA and Credit Suisse Group AG have stopped providing trade finance for Russian commodity flows, according to people familiar with the matter. Dutch banking giants ING Groep NV and Rabobank are restricting lending to deals involving the movement of commodities from Russia and Ukraine, and Chinese banks are also pulling out.

That means that even without sanctions, many of the commodity markets in which Russian exports play a major role are at risk of being crippled. Cargo ships were bombed last week, so as the war intensifies, so does the risk of logistical problems. Insurers refuse to cover ships passing through the Black Sea, or charge huge premiums to do so.

Grain cargo in Ukraine stopped with the closure of ports. The repercussions are mounting throughout logistics chains as buyers seek alternative supplies.