Wednesday, February 01, 2023 | Rajab 9, 1444 H
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Commodity markets' reaction to Russian invasion


The commodity sector continued its ascent this past week with the Bloomberg Commodity Spot Index reaching a fresh record high on Thursday after Russia’s unprovoked attack on a sovereign nation saw volatility jump across most asset classes. The stock market suffered steep losses while investors looked for shelter in bonds, the dollar, and not least commodities where an already tight supply outlook supported the sector's geopolitical and safe-haven credentials.

Ahead of the weekend, the across market temperature was lowered after a fresh round of sanctions by Western nations stayed clear of impacting Russia’s ability to produce and export commodities such as crude oil and gas. As mentioned, the Bloomberg Commodity index rose with gains seen across all sectors, with the exception of softs. The biggest moves involving gas, crude oil and wheat, all commodities where a prolonged conflict could impact supply from Russia and Ukraine.

Wheat: As Russian troops, tanks and missiles entered Ukraine, global wheat prices leapt to a record with other key crops such as corn and edible oils also receiving a strong bid. These developments helped drive the Bloomberg Grains Index higher by 4% on the week, thereby outperforming the energy sector. Paris and Chicago traded wheat futures jumped by more than ten percent with a disruption to shipments from the Black Sea region as well as potential risks to this seasons harvest in a Ukraine known as the “breadbasket of Europe” raising the prospect for even higher food prices.

However, with Ukraine having already shipped two-thirds of its intended exports by November last year, the short-term impact should be limited. With that in mind, the focus will be turning to this year's harvest and with the global market for wheat, just like many other commodities currently being as tight as it is, any disruptions or reduced crop will be felt across the world.

Crude oil experienced another week of wild swings with the initial but later deflated threat of Russian supplies being curbed due to sanctions driving Brent crude oil above $105 and WTI above $100 for the first time in seven years. After surging 15 dollars in a matter of days, crude oil then gave back more than half of those gains ahead of the weekend after US sanctions stayed clear of targeting Russia’s ability to export crude oil. In addition, traders had to deal with the potential impact of another release of oil from US strategic reserves as well as ongoing Iran nuclear talks where an agreement would increase supply.

OPEC+ meets next week but at this stage the group has shown no inclination to increase production, primarily due to the fact many producers are already struggling to reach their production targets while Russia, if allowed, is likely to hit its production limit within months. With this in mind, the oil market is likely to remain supported with an easing of tensions unlikely to send prices down by more than ten dollars.

With Saudi Arabia being one of the few producers with a meaningful amount of spare capacity not showing any willingness to add additional supplies, the market has increasingly turned its attention to Iran and renewed efforts to revive the nuclear accord. An agreement could according to the IEA add 1.3 million barrels per day, an amount that would help stabilize but probably not send prices lower.

Global oil demand, barring any sharp economic slowdown, is not expected to peak anytime soon and that will add further pressure to available spare capacity, which is already being reduced monthly, thereby raising the risk of that current high and even higher prices will remain for longer.

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