Since time immemorial, global financial markets have typically reacted negatively to rumors of wars; start the recovery process long before actual wars end and ultimately manage to shake off the worst after-effects shortly after wars are over. This pattern appears to be playing out with Russia’s latest aggression toward Ukraine, albeit with some important caveats.
The West has responded with a raft of sanctions against Russia.
On Thursday, the United States, Canada and the United Kingdom slapped fresh sanctions on Russia including excluding Russia’s largest financial institutions from global financial systems; Imposing an asset freeze against all major Russian banks, canceling all export permits with Russia and prohibiting all major Russian companies from raising financing within their territories, among other measures.
Predictably, world markets are collectively having hissy fits, with the biggest of them all, the S&P 500, down 10% since the beginning of the year for its worst start to the year, ever. According to Fidelity Investments, the escalating conflict has shifted the value of mutual funds and exchange-traded funds in millions of retirement accounts, even for people who have not thought deeply about Eastern Europe and who have never invested directly in oil, gas or other commodities.
But as Sir Winston Churchill once admonished, never let a good crisis go to waste. Several sectors of the market are actually benefiting from the crisis amid heightened volatility. Here are three such sectors.
#1. Oil and Gas
Russia is an oil and gas powerhouse, with the country pumping about 9 million barrels of crude oil a day. In comparison, the U.S. pumps about 11.6 million barrels while global oil production runs to roughly ~96 million barrels per day. Russia is the world’s No. 3 exporter of oil.
Benchmark international crude oil prices are up about 20% year-to-date to trade near seven-year highs, with the oil markets facing supply headwinds.
OPEC+ has been setting a high bar for itself, boosting production quotas by 400kb/d each month since mid-2021. The group has consistently missed budgets, and there are signs that things are getting worse. The "OPEC 10," countries within OPEC but excluding Venezuela, Libya and Iran, were budgeted to increase production by 254kb/d in January, with the remainder of the 400kb/d quota allocated to Russia and others. Official results released a few weeks ago indicate that OPEC 10 had increased production only 135kb/d, and now sits a full 748kb/d below self-imposed quota levels.
Outside of the core 10, Libyan and Venezuelan volumes fell while Iranian volumes increased. In total, the three countries saw volumes fall 33kb/d month on month. Meanwhile, Russian volumes for January increased 85kb/d, compared to the country's budgeted 100kb/d increase.
In a break from recent history, there doesn't appear to be a strong supply response to rising prices and declining inventories. When Chevron (NYSE:CVX) reported Q4 results two weeks ago, the company guided the street to flay YoY production in 2022. Exxon (NYSE:XOM) did the same, as did BP (NYSE:BP) and ConocoPhillips (NYSE:COP). Bakken producer Whiting (NYSE:WLL) announced they plan to increase capex 55% in 2022 and acquire assets to generate only ~3% production growth. Driller Nabors (NYSE:NBR) reported earnings Tuesday and indicated they don't expect to add any rigs outside the US in Q1.
Veteran strategist David Roche has predicted that oil prices will “certainly” hit $120 a barrel and the global economy will be “radically altered” if Russia invades Ukraine.
The same case applies to natural gas.
As the world’s 2nd largest exporter of natural gas, supplying 40% of European natural gas, Russia has massive sway in the gas markets--especially if it decides to hit back at sanctions by turning off its gas taps.
So far, Russia has not made any direct indications they will restrict energy exports, though rhetoric is heating up and gas flows from Russia to Europe remain ~50% below the 5yr average. Two months ago, European natural gas prices hit new highs after a pipeline that brings Russian gas to Germany switched flows to the east. Westward gas flows through the 2,607-mile-long Yamal-Europe pipeline, one of the major routes for Russian gas to Europe, have been gradually falling, a move the Kremlin says has no political implications. Some western politicians contend that Russia is using its natural gas as a weapon in the political tussle tied to Ukraine, as well as delays in the certification of another controversial pipeline, Nord Stream 2. Russia, of course, has denied any connection.
Despite already trading at multi-year highs, oil and gas prices could spike in the event of any supply disruptions from Russia since both markets are already considerably tight.
Top ETFs to play:
- Energy Select Sector SPDR ETF (NYSEARCA:XLE)
- SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP)
- The United States Natural Gas ETF, LP (NYSEARCA:UNG)
#2. Clean Energy
After enduring a year to forget in 2021 and another poor run at the beginning of the year, renewable and clean energy stocks are coming alive as the Ukraine crisis escalates. The sector’s favorite benchmark, iShares S&P Global Clean Energy Index ETF (NASDAQ:ICLN) jumped 7.6% on Thursday after Russia invaded eastern Ukraine for its best one-day gain in years.
Just months removed from the COP26 Summit in Glasgow, energy security is dominating climate action in the headlines thanks in large part to Europe’s over dependence on Russia for its energy supplies. On Tuesday, Germany halted the Nord Stream 2 pipeline--which is designed to double the amount of its gas imports--after the country made the decision to phase out nuclear power in 2011 and discontinue coal power by 2030. With Germany now relying on Russia for 55% of its gas imports and the rest of Europe not much better off amid soaring oil prices, Europe is facing one of its worst energy crises in history.
"Germany is right on Nordstream2. The pipeline has to be assessed in light of the security of energy supply for the whole of Europe. We are still too dependent on Russian gas. We have to strategically diversify our suppliers and massively invest in renewables,’’ European Commission President Ursula von der Leyen has tweeted.
Top ETFs to play:
- iShares S&P Global Clean Energy Index ETF (NASDAQ:ICLN)
- Invesco Solar Portfolio ETF (NYSEARCA:TAN)
- First Trust Exchange-Traded Fund II - First Trust Global Wind Energy ETF (NYSEARCA:FAN)
Russia isn’t just a heavyweight in energy production, but is also one of the world’s most important producers of minerals and metals like aluminum, cobalt, nickel, copper, platinum, gold and diamonds.
Prices of all these commodities have been on a northerly trajectory, but that’s the least of it: shortages of Russian commodities could cause further supply-chain bottlenecks.
Russia accounts for ~6% of global aluminum supply, and an escalation of tensions between Russia and Ukraine raises the likelihood of a supply shock in an already tight aluminum market.
According to the U.S. Geological Survey, Russia made roughly 3.7 million metric tons of aluminum in 2021, with world production of the metal amounting to about 68 million metric tons. Data by CIA World Factbook shows that China is the world’s biggest aluminum producer, making about 39 million metric tons in 2021, but Russia is also a large exporter of the commodity.
Aluminum prices have risen about 18% year to date, with prices near multiyear highs, but could still rise further. Jefferies analyst Christopher LaFemini says that even if geopolitical risks in Europe subside, aluminum prices probably would decline at first before rising again as the market deficit likely would persist.
Meanwhile, shares of one of the world’s largest aluminum producers Alcoa Corp. (NYSE:AA) have jumped 170% over the past year and 23% YTD. LaFemina has raised his price target to a Street-high $90 from $75, good for 15% upside, while reiterating his Buy recommendation, as on escalating fears that reduced supplies from Russia.
Meanwhile, USGS data shows that Russia produced 920,000 tonnes of refined copper in 2021, about 3.5% of the world total, out of which Nornickel produced 406,841 tonnes.
UMMC and Russian Copper Company are the other two major producers, with Asia and Europe being Russia’s key export markets.
Prices of green metals including copper are projected to reach historical peaks for an unprecedented, sustained period in a net zero emissions scenario. Copper prices are sitting at all-time highs thanks to surging demand, especially in developed countries, with increasing usage in electric vehicles and wind farms, solar panels and the power grid, combined with tight supply.
Benchmark copper prices on the London Metal Exchange are currently sitting at $10,100 per ton, not far-removed from its May 2021 all-time high of 10,724.50 per ton.
Copper is being billed as the new oil, with the ‘green’ shift in the post-COVID economy supporting higher demand for copper and other base metals since EVs use about 4x more copper than gasoline-powered vehicles. The International Copper Association estimates that the rapid rise of EVs will raise copper demand in EVs from 185,000 tonnes in 2017 to 1.74 million tonnes by 2027.
Top ETFs to play:
- iPath Series B Bloomberg Aluminum Subindex Total Return ETN (NYSEARCA:JJU)
- iPath Series B Bloomberg Copper Subindex Total Return ETN (NYSEARCA:JJC)