The effects of the Ukraine crisis

Fears that the escalating Ukraine crisis could affect one of Europe’s main energy supply routes caused oil and gas prices to bounce quite dramatically this morning.

Risk to oil and gas supply lines

Russia is the biggest supplier of natural gas to Europe. It controls all gas into Ukraine, which then feeds all supplies via pipeline into Europe. So it’s somewhat fortunate that Europe is coming into warmer weather, and that gas stockpiles in the region are at a four-year high.

Europe imports around 30% of its supplies from the Russia and, although this figure is lower than last year’s, the knock-on effect on alternative commodities such as oil has been palpable. Brent crude oil touched a high of $112/bbl this morning – its highest since the end of December – as a result of speculation that disruption to the gas pipeline, as well as oil supplies from Russia, will intensify should actual war break out.

Exodus from equities

The selloff in the equity space has been broad, with no benchmark index escaping the risk-off sentiment. All European indices, as well as the US, have seen investors exit to some degree, to wait until there is some clarity on what might occur in eastern Europe.

The main index of Russian stock, the MICEX, was one of the worst afflicted, dropping by 10% today.

Flight to safety

One of the main beneficiaries of the lack of appetite for risky assets such as equities has been gold. Traditionally capital flows to safety as uncertainty prevails. The gold price performance in February was the best since last July and, despite falling some 30% last year alone, there appears to be a change in sentiment towards the metal lately, both from a retail and institutional stance.

The most hated investment of 2013 is now at a turning point, having recovered some 14% since the beginning of the year. And, as additional short positions in the metal unwind, we may be poised to go higher.

As it stands, we are witnessing a break out of a 16-month trendline resistance, with the price now at $1352/oz. Any daily close above $1360/oz puts the safe-haven metal in good stead to tackle $1400 – a level not seen since September of last year.

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