Yogi Berra would be smiling. The baseball manager supposedly complained that “a nickel ain’t worth a dime anymore.” On Monday, however, a nickel was suddenly worth several dimes.
The metal for which the five-cent piece is named soared in trading, with three-month forward contracts jumping from $20,000 to over $100,000. Things got so wild that the London Metals Exchange suspended trading altogether and said it may not re-open until next week.
The root cause of this week’s nickel freak-out was Russia’s invasion of Ukraine. Russia is a major supplier of nickel which is in short supply due to rising demand for use in lithium-ion batteries. Traders are worried that the Russian supply might be removed from the market. This could be brought about by official sanctions or by circumstances such as we saw in oil last week, when much of the demand for Russian oil simply vanished, putting upward pressure on the price of oil from everywhere else.
Even though Russian nickel has not been officially sanctioned, today’s announcement by President Joe Biden that Russian oil would be banned from the U.S. indicates that this may not be the case forever. The U.S. and its allies were adamant that they were not sanctioning Russian energy and had no plans to do so for the first two weeks of the invasion. But oil market participants were skeptical that this was as stable a situation as official pronouncements indicated. And they were proved prescient on Tuesday.
There’s a bit of weird market recursiveness in what happened with oil. Refiners, shippers, and other market participants were avoiding Russian oil for fear of sanctions. This pushed up the price of oil and meant that very little Russian oil was purchased for delivery in the U.S. That lowered the cost of actually imposing the sanctions, thereby increasing the likelihood that they would be imposed. By the time the sanctions were announced, they had more or less already been priced in, so there was no big market convulsion.
For now, at least, Europe will continue to buy Russian oil and, especially, natural gas, although the U.K. has announced plans to exclude Russia by year’s end. There is some reason to wonder whether Russia will hold up its side of that particular trade. Sanctions have increasingly cut off Russia from access to both its foreign reserves and markets in which it might spend euros or dollars. Which raises the question: Why would Russia want euros it has no use for? The principal reason to sell Europe natural gas is to collect euros. But with Russia cut out of most of the things it could buy with euros, it may well decide to stop selling Europe natural gas.
That’s a risk that is not priced into markets and one that seems to have gone generally unconsidered in the U.S. and Europe. But it most assuredly is under consideration in Moscow. Europe’s plan to survive on Russian energy until it completed a transition to renewables now looks shakier than ever. As Yogi himself once put it, “The future ain’t what it used to be.”
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