Energy Markets in View

Consumers were feeling the pinch of higher energy prices even before Russia invaded Ukraine. Energy prices have surged to multi-year or record highs amid the war, and many are wondering if they still have further to go. Here, Franklin Equity Group’s Frederick Fromm shares his latest views on investing in the sector.

Commodity Markets in Disarray

Commodities have been soaring since the second half of 2020, and they continued to do so in response to Russia’s invasion of Ukraine since the former is a major exporter of crude oil, natural gas, nickel, aluminum, palladium and other commodities, while the latter is a major exporter of wheat and corn foremost. Events in Europe were seen as boosting global inflationary pressures and complicating supply chain disruptions.

The escalation of the Russia-Ukraine conflict led to the imposition of retaliatory sanctions by Western nations against Russia, translating into major supply disruptions—and the creation of stopgap measures among commodity buyers. Commodity markets were thrown into disarray by the move as Ukrainian grain-handling ports shut down and select metals refineries were idled. In Russia, liquefied natural gas (LNG) orders were paused, finance for the country’s raw materials trade evaporated and Black Sea wheat sales froze.

European natural gas prices spiked nearly 40% on the news as the wartime restrictions sparked concerns about potential energy shortages.1 As it pertains to oil, Russia produces over 10 million barrels per day (mb/d) of crude, about the same as Saudi Arabia.2 At an oil price of US$100 per barrel, Russia’s oil revenues are around US$365 billion at an annual rate currently.3 The European Union (EU) is Russia’s largest trading partner, accounting for 37% of its global trade in 2020. On average, the EU receives nearly 40% of its natural gas and more than a quarter of its oil from Russia.4