Crude Plummeted as Sanctions against Russia Unlikely Affect Supply

Commodities gave up previous gains and end the day in red as there were few breakthroughs after the Crimean referendum result showed that the majority of voters favor joining Russia. Crude oil prices declined with the front-month WTI contract losing -0.82% and the Brent crude contract tumbling -2.16%. Gold also lost ground as investors took profits after rising over the past 5 consecutive days. The Comex contract initially soared to as high as 1392.6 before settling at 1372.9, down -0.44%.

The result of the Crimean referendum was widely anticipated given the majority of ethnic Russians in the autonomous republic. Following the release of preliminary results, the White House released a statement noting that the international community “will not recognize the results of a poll administered under threats of violence and intimidation from a Russian military intervention…Russia’s actions are dangerous and destabilizing. Military intervention and violation of international law will bring increasing costs for Russia”. The US government has announced sanctions on 7 top Russian government officials and 4 others in the Ukraine. The EU also decided to freeze assets and impose travel visa bans on 21 persons. Despite these, Russian President Putin has reportedly signed an order recognizing Crimea’s independence, effective immediately.

Commodities dropped despite the sanctions as investors believed the penalties are not strong enough to affect commodity trades. We understand the high dependence of European countries on Russian gas and oil. Yet the sanctions imposed by Europe appeared to be carefully designed so that they would not restrict it oil and gas supply from Russia.

Today in Asia, the RBA minutes for the March meeting reiterated the neutral monetary stance exemplified in the post meeting statement. The central bank indicated that the cash rate would stay at its current level of 2.5% “for some time if the economy was to evolve broadly as expected” as “developments since the previous meeting had supported that assessment” and “there were further signs that low interest rates were providing support to activity, with improved economic conditions evident across a range of household and business indicators”. Improving economic developments have reduced the chance of further rate cuts. Westpac drops its forecast for rate cuts this year and now expects “flat rates throughout 2014”.

Oil N Gold