Russia/Ukraine Crisis Investment Analysis

The Russia/Ukraine crisis has led to a great opportunity to make multiple investments in various assets that could make a good return. In this article, I will be discussing those assets and analysing them from a technical perspective.

Natural Gas:

The Russia and Ukraine crisis will cause a strain on Natural Gas prices. In this article, I will be discussing the Natural Gas outlook for the next couple of weeks to months.

Global natural gas consumption rebounded by around 4.6% in 2021. This strong growth demand was led by an economic recovery following the 2020s lockdowns and a succession of extreme weather events. Supply could not keep up. Along with unexpected outages, this led to a tight market and steep price increases. The year closed with record high spot prices in Europe and Asia, as natural gas supplies remained very tight. Beginning with the Russia/Ukraine crisis from the end of January till today natural gas spot prices have seen a rapid rise. By almost 35%, from around 3.631 to 4.902.

This has been solely due to a fear of an invasion into Ukraine. The reason is simple, Europe heavily relies on Russia for natural gas. Around 40%. A third of the gas comes from pipelines underneath Ukraine, Germany is trying to circumvent this issue with Nord Pipeline 2. But this is still in the making and the US have said that they would stop this pipeline if there were any invasion into Ukraine. So, an invasion into Ukraine will be a good buying opportunity for Natural Gas.

However, there's a problem.

If the markets, see a problem looming in the commodities sector they almost always price in the problem from the get-go. So, I suspect many large banks, traders are ready for an invasion and gas producers have already got a supply of gas that can be shipped, if need be, to circumvent the gas supply shock that would occur if Russia invaded Ukraine. Also, A senior Biden administration official said last Tuesday that the US has held talks with major gas producers in North Africa, the Middle East and Asia, as well as domestically about their willingness to “temporarily surge” their gas output to meet any supply shortages. This would lead to a medium-term fulfilment of gas prices and the increase may not be as pronounced as one may imagine. I still believe there will be a large short-term spike in the prices, but this would not sustain for very long and eventually, the price will level out. Only if the supply shortages are met. If not, then the prices may continue to rise. So, if an invasion comes then a spike in natural gas and oil prices will probably occur. After that, I will wait and see how the supply shortage is managed and how that will affect prices.

European Bank Stocks:

A few western companies that are listed could very much feel the consequences of the Russian invasion.

Energy firms revenues and profits may be offset by a potential oil price jump so that is not a major concern right now. The financial sector is where I see an issue. According to calculations by JPMorgan, for the financial sector, the risk is concentrated in Europe. Any conflict in Ukraine will hit Russia just as you would imagine, there would be an economic hit and, along with sanctions that the US will impose this doesn’t sound good. Raiffeisen Bank International derived 39% of its estimated net profit last year from its Russian subsidiary. Hungary’s OPT and UniCredit are around 7%. While Société Générale was seen generating 6% net profits through its Rosebank Retail Operation.

This would be a great short opportunity in the event of an invasion. Led by a general market selloff, these banks would probably take a larger than average hit.

Safe Havens:

Gold is mainly an anti-inflation hedge, but any uncertainty could lead to a short-term spike in prices. Probably between 5% - 10%.

The Euro/Swiss franc exchange rate is seen as the biggest indicator of geopolitical risk in the eurozone as the Swiss currency is viewed by investors as a haven. Any conflict will lead to uncertainly and this uncertainty will lead to the Swiss franc increasing in value.

To conclude, any conflict would probably lead to:

Gold = Price rise between 5% - 10%, the rise may be somewhat sudden, but this growth may take weeks or months to emerge. So would make a good medium-term position.

European Banks stocks = Raiffeisen Bank International, OPT, UniCredit, Société Générale would see a larger decrease along with a market selloff. In that order above of larger decrease to smaller. I suppose a general short on the European and maybe US stock indices would be alright.

Natural Gas = Would see a large spike short-termly around 10% - 25%. After the supply shortage is fixed or investors are happy it is coming the spike could level off. But I would pay attention to what Government officials are saying. If the supply shortages are taken into account and investors and governments are prepared for this invasion there could be a smaller spike than what you would expect. As usual with the markets in any asset. The more uncertainty and more time that passes from the anticipation of the event the less the price changes that will occur. Since a large driver in global markets is investor uncertainty and immediate shocks could lead to problems but a longer and more anticipated issue will probably not have that much of an effect compared to immediate concerns.

I have also added my outlook on the assets in an event of an invasion.

Natural Gas:

In 1991 the spot price of natural gas begins around 1.649, the highest price was around 16.470 near the end of 2005. But, for the largest period, it's been between 1.649 and 6.162. In the last decade, the spot price has only on three occasions reached that amount.

The purple indicator second to the bottom is the RSI, it measures overbought and oversold situations. Since natural gas is a commodity, I’m not going to focus largely on these indicators apart from the CCI (commodity channel index). Which is designed for assets such as natural gas. The RSI has seen overbought levels which have been represented by the purple boxes on the chart. Most of these events have been geopolitical and not nearly related to technical stuff. So, the large increase in the RSI which would inevitably come in the event of an invasion should be mostly ignored. Only recognize that the increase is related to the event and when the RSI starts to cool off it could be a sign to sell.

The blue indicator is the CCI. This indicator is used to signal overbought scenarios as well. Since it works by comparing the current price by the average price over some time. The times when the CCI has been overbought are presented by the blue circles on the graph. As with the RSI, I would use this indicator only to see a sell, not a buy. Since the indicator lags in time, the event and spike in price will come before it is shown on the indicator and could cause a delay in action which could result in a bad timing in position.

The red lines represent all-time lows and highs. The orange lines are recent highs and lows based on the last decade. But the important lines are the black ones. These represent an area of resistance for the price going back to 2002. The price has stalled and found support and resistance in this region. So, if one wants to have a long-term position in natural gas, I will use this to measure the level of support of the resistance. These lines would not cause any issues in an event of an invasion since the price would probably spike through and ignore the resistance. But when the price cools down, you can expect it to find this region as a support level and that could signal a sell.

The blue arrow is my prediction in the event of an invasion. The highest peak of the arrow is where I see some form of a bad scenario working out. But if the US and Europe make sure the gas supply is sufficient, I do expect a rise in the price but not to the arrowhead. Only between the top black line to the orange line. Which is the green rectangle. The growth of the green rectangle represents a rise of 40% which, is more than enough to make a decent profit.

European Bank Stocks:

Raiffeisen Bank International:

The two orange lines represent all-time highs and lows. The two black lines represent the last decade support and resistance levels In early 2014 when Russia invaded Crimea the stock fell by around 32%. In the event of an invasion, I see the stock falling towards the bottom black support line. Represented by the blue arrow. This would be a drop of around 22%.

OTP/UniCredit/ Société Générale:

The stock only fell around 16% when Russia invaded Crimea and the movement doesn’t seem dissimilar to any other movement that the stock has mas made around that time, so I won’t consider it here. The same can be said of UniCredit and Société Générale.

Safe Havens:

Gold:

Gold went up approximately 10% during the last crisis so I expect a similar result. If Gold does rise 10% again this would lead to a breakout of a right-angled triangle and would lead to near all-time highs so I would sell near that region since it could be a level of resistance.

Euro/Swiss franc:

The currency didn’t perform how I would have liked during the last crisis, but it is what I would expect. This currency is a haven, so it won't be that volatile. So, this could be a good buy to wait out the volatility and any market selloff.

Happy Trading!

Regards, Usman