Tensions have risen

Since December, tensions between Ukraine and Russia have escalated. The conflict went live when US and NATO decided to respond to Ukraine’s calls to join the 30-state body.

Stand-offs between Ukraine and Russia are not something new to go by, but the scale of the conflict is much more prominent this time. Several NATO countries have been involved; others keep a relatively neutral stance against what seems to be a game of political power at first. In the shake of peace, can it be contained to just geopolitics, and perhaps spillover to economics too, or grow to something more frustrating?

What Happened?

Following NATO’s response, Russia demanded that NATO stand down on Ukraine’s calls. According to the Minsk agreements, NATO’s expansion to the Russian borders threatens the territory’s security. Russia’s demands were turned down despite Ukraine failing to invoke the peace protocol it signed back in September 2014 and February 2015. It’s not the first time both sides have violated the agreement, though.

According to online sources, Russian President Vladimir Putin moving 100,000 troops near Ukraine following the rejection. And while the atmosphere was tense, the US claimed that Russia was preparing to invade the country. In return, US President Biden put thousands of troops on standby for deployment. The geopolitical confrontation turned into a conflict zone involving Germany, France, the UK, Baltic countries, Turkey, and even Qatar and other Asian countries.

It’s a dangerous game

As the geopolitical struggle between the main actors, Moscow and Kyiv, intensifies, several allies have stepped their game up for Ukraine in an attempt to ‘resolve’ the stand-off. Britain has sent Ukraine anti-tank weapons, followed by Baltic countries only a few weeks back, Latvia and Lithuania decided to send thermal sights on top of missiles, and the list goes on.

European countries have no consensus as most understand the dangers of sending arms to an already ‘hot’ spot. Germany has been involved in blocking “lethal” arms exports to Ukraine. Other than that, its position is not too clear. That’s the case with France too. Both have considered Russia and Ukraine equally responsible under the “Normandy Format”. Meanwhile, the US has approved all requests to move defensive warfare equipment to arm Ukraine.

Things can turn worst fast with a resolution at a standstill as countries threaten Russia with strategic and financial sanctions. Moscow has repeatedly commented that it has no plans to invade and urged the US to soften its stance. On the other hand, the US says that troops are prepared to be deployed in Europe for the sake of Europe’s security.

What’s at stake?

Apart from rhetoric and military preparedness around Ukraine, the scale of the conflict seems to be more about the demonstration of power than it is about enforcing aggreements, according to Russian policy expert Fyodor Lukyanov. It appears that Europe is just a political actor. However, Europe’s security is at risk as tensions have risen. It is doubtful that it spikes to war, but there is a risk as geopolitical dynamics shift.

Although diplomacy is also at stake, one would argue that talks between Ukraine and Russia have not been fruitful over the years. Or between Russia and other actors for that matter. Perhaps the pace and intensity of negotiations would support de-escalation, but knowing how ‘talks’ end between parties, it all turns, as history proves, to sanctions.

Realistically speaking, economic and strategic sanctions will add a different dimension to the conflict, but it’s unlikely they materialize before an invasion or at least some sort of aggression. That’s not a one-way route either. Any imposition would have an immediate retaliation and impact. This is something that the European countries already pay for at energy prices and are likely to continue doing so as long as they relies on one source of oil and gas. On a different note, physical resources of gas are at risk should a war outbreak, adding to the mix, especially when considering the gas pipelines passing through Ukraine.

European energy crisis

According to S&P Global Platts Analytics, prices of European energy products have surged in 2022 as deliveries plummeted through all four main pipelines from Russia. The plunge is not new, however. Supplies have been deteriorating on new US and UK rhetoric around Europe’s controversial energy infrastructure project, Nord Stream 2, since last year. And it remains at hold in Germany, due to regulatory concerns. Some analysts cite tensions, others Russian gas becoming cheaper vs. European hubs.

This, combined with freezing weather in Europe and across the globe, has spooked investors over the winter months. Future contracts for February’s Natural Gas surged 72% on January 27, ahead of the expiration. Short-squeeze or not, the commodity’s real demand brought inventories to below 5-year average. As if that wasn’t enough, NATGAS prices spiked on Feb 2^nd, too, after a cold blast stoked demand for heating and electricity in the US.

Given the current state of affairs, Europe’s energy policy cannot change in a day to avoid the economic pain caused by anticipated sanctions towards Russia and reliance. Despite Europe making swift amends to source energies from elsewhere, it seems only improving relations between Russia and the EU will stop the craze in the short term. Until then, natural gas prices in the EU will likely continue to soar.

Next for Natural Gas

Although one might argue that NAT.GAS prices are primarily priced In, there have been no changes of size in trading dynamics to indicate it’s done in effect to extend price as if actual sanctions occurred. This suggests a binary outcome for the prices of the commodity:

1. Tensions escalate, and prices soar beyond $6.5, finding support at the 20-week moving average near $4.70
2. Tensions de-escalate, and prices take a breather from rising further, finding support at the 4-week average near $4

In both cases, the situation in the gas markets is unlikely to change to the downside as long as cold weather spooks investors. For the longer term, that would be a case where the EU becomes less reliant on Russia to source energies. Until then, it’ll all hang on the conflict, Nord Stream 2, and power politics – it seems.

Here at Amega FX, we have a responsibility to inform you about markets and some obvious opportunities geopolitics produce at times. Inviting you for trading these instruments with spreads from 0 pips, gives you all access needed to the world of commodities.

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