Commodities, with a few exceptions, have rallied strongly since President Putin ordered the attack on Ukraine, thereby triggering a change in the market from worrying about tight supply to actually seeing supply disappear. With Russia, and to a certain extent Ukraine, being major suppliers of raw materials to the global economy, we are currently witnessing some historic moves with Russia’s growing isolation and self-sanctioning by the international community cutting a major supply line of energy, metals and crops.
While the focus has been on crude oil given its global importance as an input cost to the wider economy, other markets such as gas in Europe as well as coal have seen incredible strength with the market attempting to price a potential shortfall in supply. From a global food security perspective, record wheat prices in Europe and US prices at their highest since 2008 are causing a great deal of concerns as well.
The strong and unprecedented response to Russia’s attack on Ukraine is rapidly being felt, not only in Russia where the economy is in free fall with the country’s major stocks collapsing by more than 90 per cent before trading was halted while the Russian Ruble has reached its lowest level during twenty years of President Putin’s leadership. Across the world, a combination of outrage and self-sanctioning have seen flows of oil, coal and many other commodities originating in Russia slow with buyers increasingly viewing Russian-produced and mined products as toxic.
These developments highlight the risks to the global economy, especially from a long drawn-out conflict. In such a situation, prices of commodities in short supply would likely have to rise to levels where demand starts to become negatively impacted, thereby supporting the return to a more balanced market. At this point, having seen these historic moves, it is also incredibly important to stress that we are dealing with a situation that could have a binary outcome. Any sudden solution that warrants the removal of sanctions could trigger a significant correction across many key commodities, potentially reversing the strong gains seen in the table above.
Global commodity markets are tightening and as a result the Bloomberg Commodity Spot Index continues to reach fresh record highs. The stunning 9.4 per cent surge this past week is the biggest since 1974 when the OPEC oil embargo triggered the 1973-74 oil shock. Looking at the futures curves we find that most of the major commodity futures are seeing a rising backwardation, a gauge which helps measure the market’s concern about shortfalls and the higher price buyers are willing to pay for immediate delivery compared with delivery at a later date.
Crude oil reached a 14-year high on Thursday after Brent almost touched $120/b before suffering a ten-dollar correction on speculation that a nuclear deal with Iran could be reached this weekend. Global oil majors including BP Plc, Shell Plc and Exxon Mobil Corp. are exiting Russia while buyers are shunning the nation’s crude as they navigate financial penalties and soaring shipping costs. As a result, the global market is currently in a flux with Russian unwanted crude varieties trading at a deep discount to Brent.
Following a record short meeting on Wednesday, OPEC+ decided to rubberstamp another unobtainable 400k b/d production increase for April. As it turned out, this meeting was more about keeping OPEC+ stable than the oil market with the elephant in the room of the Ukraine war and Russian sanctions not being addressed. It highlights the tightrope the group has to walk, perhaps also considering the fact the toolbox, i.e. spare capacity, is running close to empty. In the short-term, with no solution in sight, the price may need to rally to levels that kill demand. A peace deal on the other hand may remove a large chunk of the gains seen during the past ten days.
Wheat prices spiked to a fresh 14-year high in Chicago while the Paris high-protein milling wheat contract has been setting daily records culminating on Friday when it jumped to €385/tons, some 30 per cent above the previous record from 2008. Ukraine and Russia export 29 per cent of the world’s wheat, mostly via the Black Sea, a route that is now offline following attacks on cargo ships near Odessa. From a global food security perspective, this is a very serious development as wheat together with rice are two of the most important food staples. Among the world’s top ten importers of wheat we find several developing nations from Egypt and Turkey to Indonesia and Algeria, all countries where surging food costs will have an outsized negative impact. [The writer is Head of Commodity Strategy at Saxo Bank]