The US has said it will begin evacuating non-essential embassy staff from Ukraine in the week starting Jan. 24 as concerns over a possible invasion of the gas and oil transit hub helped push crude futures prices close to breaking $90/b.
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A worst-case military escalation could affect 250,000 b/d of Southern Druzhba pipeline flows through Ukraine, but export capacity at alternate ports and pipelines is a sufficient offset, warned S&P Global Platts Analytics in a recent report.
At 1110 GMT on Jan. 24, the ICE March Brent futures contract was down 9 cents/b from the previous close at $87.80/b.
The following are key facts on the potential impact for commodity sectors:
-- Russian gas transport through Ukraine has been in decline in recent years and collapsed at the start of 2022.
- Out of the 109.9 million cu m/d Russia could potentially deliver via its EU transport accord, net Ukrainian exit flows are averaging 45.10 million cu m/d this year to Jan. 22.
- Ukraine gas transit to Hungary fell to a trickle in late 2021 after a new interconnector linking Hungary to Serbia opened. This enabled greater Russian volumes to be transported via Turkstream across the Black Sea.
- Russia threatened to cut off gas supplies to Moldova in late October 2021 amid late payments for deliveries and as European prices skyrocketed. A new five-year supply deal was signed between the two effective Nov. 1, 2021, utilizing Ukrainian transit.
-- Country is a critical route for oil flows into Eastern Europe and EU fringes.
- Ukraine moves Russian oil to Slovakia, Hungary and the Czech Republic. The country's transit of Russian crude for export to the EU was 11.9 million mt in 2021, down from 12.3 million mt in 2020, while oil transit to Belarus remained unchanged at about 800,000 mt.
- Last year, crude shipments via the southern branch of the Druzhba pipeline network included 5.2 million mt, or around 104,427 b/d, to Slovakia; 3.4 million mt, or around 68,279 b/d, to Hungary; and 3.4 million mt, or around 68,279 b/d, to the Czech Republic.
-- Ukraine is one of the world's largest exporters of grains, with any disruption to supplies potentially impacting food security and prices.
- Ukraine accounts for around 13% of global corn exports, being the world's fourth-largest exporter and by far the largest exporter in Europe. Half of its exports go to the EU, with China another major importer. Much of these exports are used for animal feed, with biofuels also likely to take a significant share.
- The country accounts for around a tenth of global wheat exports, which have risen 27% so far in marketing year 2021-22 (July to end-June) to 16.1 million mt, as neighboring Russia increased its export taxes.
- S&P Global Platts Analytics projected Ukraine to export 22.5 million mt of wheat in marketing year 2021-22.
-- The country is also the world's 13th-largest producer of steel and the fifth-largest exporter of iron ore by volume.
- Ukraine produced 21.4 million mt of crude steel in 2021. Some 80% of its steel output is exported.
- It exported 44.4 million mt of iron ore products in 2021 and imported 9.85 million mt of metallurgical coal and coke products. It raised 3.9 million mt of steel scrap, of which 616,000 mt was exported.
-- Oil prices hit seven-year highs mid-January spurred by a recovery in mobility levels, worries over spare capacity among key producing nations, slow progress in getting Iran's sanctions lifted and tensions over Ukraine.
- Prices for Russia's Urals crude, which ships via Ukraine, have increased since mid-December on the back of increasing geopolitical risk, as well as more positive crude demand forecasts. Platts assessed Urals crude at $87.25/b on Jan. 21, up from $68.35/b on Dec. 2.
-- European gas prices fell heavily over New Year but rose mid-January, in part as fears of a Russia-Ukraine conflict refused to abate.
- Benchmark European gas contract TTF DA surged to a record Eur182.77/MWh Dec. 21 before falling to Eur61.28/MWh at the end of the year. By market close Jan. 21 the contract was at Eur80.28/MWh, up 301% year on year, Platts data showed.
- Any conflict impacting gas supplies into Europe could have knock-on impacts on power, carbon and coal prices. CIF ARA spot coal prices have risen 66% since the start of the year to be assessed by Platts at $176.75/mt Jan. 21.
-- Ukrainian corn prices have been rising on the back of strong global demand and Russian plans to impose export duties on grains.
- Ukraine FOB Black Sea corn export prices hit a seven-year high of $301/mt in May 2021. Prices then dipped to $254/mt in September but have risen steadily since, to be assessed at $279/mt as of Jan. 21.
-- Russia could close off Ukrainian ports due to its control of Crimea and Black Sea chokepoints.
- The Kerch Strait connects the Black Sea and the Sea of Azov and is used both ways, to supply soft commodities, ship steel/pig iron and other raw materials from Mariupol.
- Russia's Azov and Rostov ports serve as both transshipment ports to load deep water vessels at the Russian port of Kavkaz and as loading points to make small parcel shipments of wheat, barley and corn to destinations in the east Mediterranean.
- Exports of both corn and wheat take place through a number of Ukrainian sea ports, including the southwestern Panamax-capable ports of Odessa, Pivdennyi and Chornomorsk, all of which are well away from the front line. However, they are all within easy reach of Crimea, which is currently under Russian occupation.
-- Druzhba pipeline security and ports key for markets.
- Ukraine ships Russian oil to Slovakia, Hungary and the Czech Republic via the southern leg of the key 25 million mt/year Druzhba pipeline.
- Mariupol, Ukraine's main port in the Sea of Azov, is vital for pig iron and steel export from Ukraine and imports of steelmaking raw materials, particularly coking coal. In recent years, steel shipments from Mariupol have represented about a quarter of Ukraine's total exports in value terms.
- Any limitation of vessels through the Kerch Strait would likely affect supply routes used by Metinvest, Ukraine mining and steel group, and other bulk shipping on the route.
-- Future of Nord Stream 2 gas link could rest on affairs in Ukraine.
- The US Senate voted down a Nord Stream 2 sanction bill Jan. 13, which would have overridden Biden administration waivers agreed with Germany.
- On Jan. 19, Kremlin spokesman Dmitry Peskov said an idle Nord Stream 2 was "bad" for consumers of gas in Europe with gas prices still at historic highs.