With the escalation of the Conflict between Russia and Ukraine, commodity prices generally rose. Risk aversion is an important cause of market volatility. Market expectations and fundamental factors of the challenge will cause precious metals, some base metals, energy commodity prices continue to high volatility.

At the start of the year, there was widespread optimism about commodities yields, and in just two months, to everyone's surprise, the situation has taken a turn for the worse, with the escalation of the Conflict between Russia and Ukraine pushing already high commodities even higher.

With the escalation of the Conflict between Russia and Ukraine, commodity prices generally rose. The Goldman Sachs commodity index is up 17.7% for the year through Feb. 25 and 5.45% for the month. Across the broad segments, risk aversion drove precious metals higher, with the Goldman Sachs Precious Metals Index up 5.27% so far this month. The Thomson Reuters CRB agriculture index is up 4.77 percent so far this month, reflecting the impact of both sides in the conflict on global agricultural markets.

Among products, energy prices have been the most prominent. The Goldman Sachs energy index is up 5.62% so far this month. The price of Brent crude oil, which briefly topped $100 a barrel, fell back to $94. Ice TTF natural gas futures, a bellwether for European gas prices, jumped about 50 percent on Feb. 24 before retreating after hitting levels that nearly doubled their end-2021 price.

Risk aversion is an important cause of market volatility. This is particularly evident in precious metals. Gold rose 7.58% in February and hit a high of $1,936.3 an ounce on Tuesday. At the same time, the size of gold ETFs has risen in tandem. From the start of the year through Jan. 22, net inflows into gold etFs backed by spot funds reached $2.729 billion, up 1.3%, according to the World Gold Council. From Jan. 22 to Feb. 18, net inflows rose 2% to $4.111 billion, driven by risk aversion.

The rally in precious metals is as much about fundamentals as it is about risk aversion. Russia is an important global producer of platinum and palladium. Demand for automotive catalyst palladium had been expected to peak in the second half of the year as supply chain pressures eased, particularly as global auto production capacity resumed. As the Ukraine crisis continues to ferment and escalate, spot platinum prices at the peak of 24 days since the beginning of the year up 16.93%.

Supply and demand fundamentals are most evident in the energy commodity market. The fundamentals of natural gas are focused on transportation. Europe relies on Russian piped gas for 30-40 percent of its gas supply. The onshore pipeline connecting yamal to Europe mainly passes through Poland, Ukraine and Belarus. Only Nord Stream 1 bypasses the geopolitical hotspots and enters Germany via the Baltic Sea. Against the background of the Russia-Ukraine conflict, Germany announced the suspension of the nord Stream 2 project approval process, and stressed that the suspension is "not a short-term suspension".

In this context, the remaining gas pipelines between Russia and Europe are particularly important. If future pipeline problems arise, Europe may have two options. One is the increase in Norwegian gas production and the other is offshore LNG imports. But given Russia's huge exports of gas to Europe, there seems to be no quick fix. More critically, LNG export facilities in the United States and elsewhere are already operating at full capacity. So, in terms of supply and demand, as Qatar has said before, no one can replace Russian gas supplies to Europe. Warmer weather will reduce demand and bring prices down, but a continuation of the conflict between Russia and Ukraine is bound to keep European gas prices relatively high.

At the crude oil level, before the Russia-Ukraine crisis, the biggest concern of the market for supply was whether Iranian crude oil would enter the market on a large scale this year. After the Russia-Ukraine crisis, the market's biggest concern for supply is whether Russian crude oil can normally enter the European market.

It is reported that western banks have interrupted the service of providing letters of credit to traders to buy crude oil, increasing the difficulty of Russian oil flowing into the market from the market operation level. At the same time, Russia exports nearly 50% of its crude oil to Europe, partly through pipelines through Ukraine, and there is uncertainty about the steady flow of Russian urals to Europe in the future.

At the start of 2022, rapidly recovering demand and slowly recovering supply were already expected to result in tight demand throughout 2022. Given the current relatively limited export capacity of the United States and the challenges of short-term large-scale influx of Iranian crude oil, the continued development of russia-Ukraine conflict undoubtedly further increases the tightness of global crude oil supply and provides support for high oil prices.

High natural gas and crude oil prices have certainly pushed up energy prices in Europe, and the spin-off effect has been on some base metal prices. In the third and fourth quarters of last year, high energy prices caused some energy-intensive Aluminium and zinc companies in Europe to shut down some capacity. Smelters are already struggling with high electricity prices from crude oil, and a new wave of energy price increases from the dispute with Ukraine will further limit Europe's ability to supply aluminium and zinc. At the same time, Russia is not only a major producer of palladium and platinum, but also a major global exporter of aluminum and nickel ore. Amid concerns that the US and Europe may impose a new round of sanctions on Russia, whether base metals will be directly or indirectly affected has been unsettling the market nerves.

As a result of these two factors, the lME three-month aluminium contract rose to $3,445 a tonne on February 24, well above the record high of $3,380 in September 2008. The three-month nickel contract on the London Metal Exchange rose to $24,716 a tonne, up 19.07% from the end of last year.

Based on the above situation analysis, the future trend of Russia-Ukraine relations will have an important impact on the trend of the commodity market, and market expectations and challenges of basic factors will cause the continuous high fluctuations in the prices of precious metals, some basic metals and energy commodities.