By Barani Krishnan

Investing.com – The Big V is Back The Big V stands for volatility. Commodities from crude oil to gas, gold, platinum, wheat, corn and soybeans saw violent price swings on Friday, barely 24 hours after hitting multi-year highs on Russia’s invasion of Ukraine. 

Both sides were affected by concerns about supply. Hours after the invasion, revisited 2014 highs of above $100 a barrel; rose as much as 62%, the most since at least 2005, hit one-year highs, just $25 short of cracking $2,000 an ounce; rose to a seven-month peak of $2,700 an ounce; hit 13-½ year highs of above $9.50 a bushel; went to 9-½ year peaks of above 17.50 a bushel and corn} stormed to nine-month highs of nearly $7.20 a bushel.

Fears of disruption in supply from war or sanctions against Russian individuals and entities drove all these decisions. The fears were more than justified: Russia is one of the world’s biggest oil and gas exporters and the largest producer of palladium. Russia and Ukraine are both major producers of wheat, corn and soybeans. 

Because of its gravity, the Egyptian Prime Minister Mostafa Mabouly called a special cabinet meeting. It discussed how the conflict might affect wheat flour supply and prices. This is a country that eats more bread per capita than other countries in the Middle East. Egyptians consume twice as much bread worldwide, and import more wheat from Russia than any other country. 85% of the wheat they purchase comes from Ukraine.

On Saturday, Western allies opposed to Moscow announced they would block “selected” Russian banks from the SWIFT international payments system, handing the Kremlin what might be the “mother of all financial sanctions”.

However, there was evidence that the disruption worries were exaggerated and that only a few US-Euro sanctions, such as those against Russian President Vladimir Putin, had any effect on any real change. 

The reality set in and the shockingly high prices of raw materials after the Russian invasion were reversed just as quickly as the price increases. Crude oil plunged by 12% after the invasion, before recovering to mid-$90s. The swings from gold to palladium to wheat to corn were also significant.

“Investors are trying to assess how back-and-forth sanctions will weigh on risk appetite,” noted Ed Moya, analyst at online trading platform OANDA.  “Russia will also respond with their own set of sanctions against Western nations.  Hard-hitting sanctions could put the Russian economy on a terrible trajectory, but that pain would be shared with Europe, so it seems that might be a last resort.”  

Moya reasoned that kicking Russia out of the SWIFT system of international payments “would make it very hard for Europe to pay for its (own) energy and for many countries that need Russian wheat and other commodities that are vital to the semiconductor space.”

Bloomberg’s Javier Blas had a more detailed – and intriguing – take on it:

“In the 24 hours after Vladimir Putin signed a decree recognizing two breakaway Ukrainian territories, the European Union, the U.K., and the U.S. bought a combined 3.5 million barrels of Russian oil and refined products, worth more than $350 million at current prices. In addition, it is likely that the West bought an additional $250 million worth Russian oil, along with tens and millions of dollars in aluminum, cobalt, nickel, titanium, gold, and other commodities. In total, the bill likely topped $700 million.”

“And that’s the way it’s going to be – at least for now. The U.S. and its European allies will continue buying Russian natural resources and Moscow will continue shipping them, despite the biggest political crisis between the former Cold War warriors since the collapse of the Soviet Union in 1991.”

Blas claimed that European fears of a cut in gas supply from the Kremlin remained fears. 

“Any military trouble remains confined to the two breakaway territories, which are far away from the mighty Russian oil and gas pipelines that crisscross Ukraine from East to West: Druzhba, Soyuz, Progress and Brotherhood,” Blas said, noting that the company that operates the gas pipeline network of Ukraine tweeted: “Keep Calm & Transit Gas.” 

He said that Russia and Ukraine were both aware of these contradictions. 

“The West knows that commodities are a cash cow for Putin, fueling his imperial ambitions thanks, in great part, to ultra-high oil and gas prices, but the allies are also aware of the economic self-harm of cutting imports to zero,” he said. “For its part, the Kremlin may be tempted to weaponize its natural resources – which could trigger blackouts in Europe. But it also knows commodity exports are its own economic lifeline.”

“It’s the commodities market version of the Cold War doctrine of mutual assured destruction, or MAD.”

Blas notes also that when dealing with adversaries like Venezuela or Iran, the White House is more likely to turn oil into a geopolitical weapon. 

“As a result, both Tehran and Caracas cannot sell oil legally in world markets, not just into the U.S. However, Russia remains free to ship its oil into America; and the U.K. continues to buy Russian diesel, too.” 

Blas concludes by saying that “at this point, neither Moscow nor the U.S. and its allies have an economic, political or military interest in weaponizing oil, gas and other natural resources.” 

In the next week, you can expect more V as the markets attempt to sort the wheat and the chaff.

Oil: Market Activity & Prices

Although oil may have met its long-awaited goal of $100 per barrel, it appears to be struggling to make an immediate return amid mixed assessments on the conflict in Ukraine and the associated risks including ever-growing sanctions for Russian individuals and entities.

On Friday, London-traded Brent oil benchmark fell by $1.15 (or 1.2%) to $97.93/barrel. Brent reached $105.79 Thursday. It was its first $100 milestone since 2014.

U.S. crude’s West Texas Intermediate, or benchmark, settled down $1.22, or 1.3%, at $91.59. WTI reached a 7-year peak of $100.54 at the last session.

Although crude prices fell on Tuesday, they still posted weekly gains with Brent rising 4.3% and WTI increasing 0.6%. The last eight weeks of non-stop gains in crude oil prices were before this week.

Crude prices dropped on Friday after energy traders thought “the war in Ukraine probably won’t lead to any disruptions of Russian crude to Europe,” said Moya. Moya mentioned also the potential of negotiations between Ukraine and Moscow officials.

While this may have been true at the time, there was still the possibility of further escalated conflict as Russian forces moved toward Kyiv, Ukraine.  

“Taking over Kyiv would be followed by a strong reaction from Western leaders, which should suggest all sanctions remain on the table, including those on Russia crude oil and gas,” added Moya. 

Officials from both the US and EU indicated that they would continue to consider blocking Moscow’s access to international SWIFT payments.

Ukraine’s Foreign Minister Dmytro Kuleba on Saturday called for a full isolation of Russia, including an embargo on the purchases of Russian crude.

Oil: The Technical Outlook

A sustained move below $88.80 can extend U.S. crude’s correction to a cluster of support and to levels of $87.20 and $86.10, said Sunil Kumar Dixit, chief technical strategist at skcharting.com.

“WTI’s weekly stochastic reading of 75/86 itself makes a negative crossover and the next leg down could be $80.70,” he said.

Volume supported buying above $91 could help U.S. crude oil retest $94, Dixit stated.

Gold: Market Activity & Prices

Gold’s dalliance with $1,900 peaks may not be over. The market appears to be at a tipping point, with risk appetite overriding safe haven trading on Friday. This sent U.S. stocks higher and bonds yields up and gold lower for the first three days in a row and its first weekly drop in four.

The traders also seem to be a bit weary of chasing bullion up on Russia-Ukraine headlines, which explains some deflation in geopolitical pressures that sent gold to 13 month highs over the last two sessions.

“Gold prices are back below the $1900 level as risk appetite continues to stage a comeback despite a tremendous amount of uncertainty with the War in Ukraine,” said Moya, the analyst at OANDA.

“This week was quite the rollercoaster ride for gold prices and while it appears poised to finish the week slightly lower, the need for safe-havens still remains.”

Gold’s most-active contract on New York’s Comex, , settled down $38.70, or 0.6% at $1,887.60 an ounce. Wednesday’s benchmark gold futures spiked to an all-time high of $1976.20 in January 2021. 

Apart from the decline on the day the Comex gold front-month declined 0.6% over the week. This is its first weekly slide after Jan. 21st when it was at $1,784.90.

Friday’s pivot in gold came as the yield on the 10-year Treasury note hit six-week highs just above 2%. Wall Street’s Dow, and Nasdaq indexes were all in the positive too, rising between 1% and 2%.

This slide follows an historic intraday plunge of almost $100 on Thursday. It was a market with everything that bullish could offer: US inflation at its 40-year peak; Russia-West tensions unlikely to be resolved anytime soon; continued weakness in stocks; which may lead to more money being diverted towards safe havens such as gold.

“The very fact that amidst one of the worst geopolitical military crises, gold witnesses a $98 historic fall, raises questions on where gold is headed actually,” said Sunil Kumar Dixit, commodities strategist at skcharting.com.

To be sure, few think there’s lasting damage to gold’s upward momentum from this week’s move lower.

Goldman Sachs stated on Thursday that gold prices could reach a record high of $23,350 due to increased demand for ETFs in light of Ukraine’s situation. 

Investing.com believes gold can rise to as high as $2,500 

We could see intraday reverses of $100 to $150 between the highs, the lows.

Technical Outlook: Gold

Gold’s path of least resistance is seen at $1,916-$1,921, said SK Charting’s Dixit.

“If gold is to rebound, it would need a daily and weekly close above $1,916-$1,921 for a resumption of its bullish momentum and a retest of the $1,975-$2,000 levels.”

Disclaimer:Barani Krishnan is not a shareholder in any of the securities or commodities he writes about.