Russia's invasion of Ukraine and the subsequent sanctions against it enforced by the Western world have enormously affected energy and broader commodity markets.

Russia supplies a substantial portion of the world's energy, food and metals needs. Although Western sanctions have been oriented specifically towards maintaining the continuity of supply for critical goods however, we have seen a strong 'self-sanctioning' effect amongst traditional customers of Russia. For instance, a commodity trading house may struggle to obtain the requisite insurance and finance to cover the purchase and transport of a shipment of Russian-origin commodities.

As such, almost overnight, we have seen an enormous uplift in demand for commodities of non-Russian origin to fill this sudden supply gap.
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For instance, Newcastle thermal coal futures, an export-focused commodity, surged 46% overnight to close at US$446 a tonne. This is in contrast to prices of ~US$190 a tonne only 2 months ago.

The important Asian LNG benchmark, the JKM index, is currently trading ~US$35/MMBtu; significantly higher than in recent months.

In addition, the price of crude oil has exploded with the Brent benchmark currently trading at ~USD$116 a barrel vs USD$77 a barrel 2 months ago.
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These circumstances have thrown up unique opportunities for Australian focused investors to capitalise upon.

Whitehaven Coal (ASX:WHC)
WHC produces high-quality thermal coal in NSW for export primarily to Japanese and Korean customers. Russia coal imports supply an estimated 15-20% of Japanese and Korean coal demand. Consequently, WHC's customers will likely be willing to increase purchase volumes from Whitehaven at higher prices than has been traditionally achievable.

In WHC's last half-yearly report, they managed to achieve an average realised price of AUD$211 per tonne of coal sold. With current spot prices over AUD$600 a tonne, we believe that Whitehaven is well equipped to capture these higher prices at greater production volumes than last quarter.

Adding to the attractiveness of Whitehaven is the commencement of a $400 million buyback, where it may purchase up to 10% of the company's share capital on-market. The debt-free balance sheet and high-quality assets make this a compelling value proposition at a market cap of less than AUD$4 billion.

Woodside Petroleum (ASX:WPL)
WPL holds a suite of Tier 1 petroleum-producing assets primarily located in Western Australia and the Gulf of Mexico. It has recently merged (subject to completion) with BHP's petroleum division and will be a global top 10 oil and gas (O&G) company in its own right. WPL is heavily exposed to the LNG markets, primarily exporting to Asia.

The company's realised prices for LNG and oil were USD$28/MMBtu and USD$80/bbl respectively. Accordingly, we see WPL as possessing strong leverage to higher O&G prices going forward whilst also paying an attractive dividend yield.

Santos (ASX:STO)
Santos holds a suite of O&G production assets located in Australia and PNG. Last calendar year, STO managed to capture realised prices of US$9/MMBtu for LNG and US$76/bbl respectively. 

Accordingly, there is a strong opportunity to capture materially higher prices given the current market conditions. We also expect that STO will reduce its stake in certain development assets which provide the potential for future capital returns along with its regular dividend.

Written By Emanuel Datt

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