Beware Beware Beware

Beware extraordinary headline risks in commodities

Ole Hansen

Head of Commodity Strategy

Summary:  The turmoil across markets continues following Russia’s unprovoked invasion of Ukraine last Thursday. Not least across the commodity sector where tougher US and European sanctions threaten to partly cut off supplies from Russia, thereby impacting several key commodities from gas and oil to several industrial metals and key crops such as wheat. With geopolitical risk and tight supply premiums continuing to rise, the potential for a solution, however remote, would trigger major moves


The turmoil across markets continues following Russia’s unprovoked invasion of Ukraine last Thursday. Not least across the commodity sector where tougher US and European sanctions threaten to partly cut off supplies from Russia, thereby impacting several key commodities from gas and oil to several industrial metals and key crops such as wheat. Ukraine, often called the breadbasket of Europe given its extensive fertile lands, which are naturally suited to grain production, has seen is supply chains break down with closed harbors preventing exports of key food commodities such as wheat, barley and corn.

Headline risks, however, goes both ways, and if the current crisis and war should see a sudden solution, crude oil could drop by 10% to 15%, EU gas by up to 50%, Paris wheat by up to 25% while gold could see a more muted 2% to 4% downward reaction. 

Brent crude oil is heading for its first daily close above 100 dollar per barrel since 2012, and despite the price by now probably includes a Russian supply risk premium close to ten dollars, the outlook remains supportive as long global demand shows no sign of easing. The price jumped following the invasion news last Thursday and the market remains bid with traders trying with some difficulty to quantify a potential drop in supply from Russia amid banks pulling financing and as shipping costs rise. These developments have driven the front end of the futures curve sharply higher with prompt and deferred spread all pricing very tight market conditions. An example being the six-month spread which has jumped to $11.50, the highest for this spread going back to at least 2007.

Also, in focus are talks, between US and major consuming nations about releasing up towards 60 million barrels of oil from strategic reserves and Wednesday’s OPEC+ meeting where the group is expected to rubber stamp another illusive 400k b/d production increase. Illusive in the sense that many producers have struggled to reach their production targets while Russia, if allowed, is likely to hit its production limit within months. The group’s Joint Technical Committee meets today, and they will pass on their analysis and recommendations to the energy ministers ahead the meeting. Nuclear talks with Iran has reached the final and most difficult stage with Iran potentially playing a hard game considering how recent price developments have moved in their favor, leaving them less likely to give the concessions needed for the US and others to accept a new deal.

With global supply still struggling to meet robust demand, the result may end up being a continued rally in crude oil until global growth slows, which it will at some point, or until soaring prices eventually kills demand.

Source: Saxo Group

European gas: The European gas benchmark, the Dutch Title Transfer Facility (TTF) trades up 12% today (Saxo ticker: TTFMJ1) at €110/MWh, or $203 per barrel of crude oil equivalent. The current price is seven times higher than the average price seen in the years prior to the rally which started last August. Intraday price swings of 25% during the past three days highlights the market’s difficulty in pricing the risk of a potential further loss of supply from Russia, a supplier of close to 40% of Europe’s gas. Storage facilities across Europe are currently around 30% full, somewhat higher than originally feared, after withdrawals slowed during February due to milder weather. The injection season normally begins in late March, and while the worst risk of supply short fall this winter is close to over, a prolonged conflict with Russia however raises the risk for next winter where the price for winter gas (October 2022 to March 2023) is currently trading close to €100/MWh while the following 2023/24 winter is priced at €51/MWh.

Wheat prices globally ended February on a strong note with the price in Chicago showing the biggest monthly jump in six years. Today, prices in Europe and Chicago has continued higher with Paris Milling wheat (EBMH2) trading near the record €341.75 per tons record high reached last Thursday while Chicago wheat (ZWH2) continues to race towards $10 per bushel, a level that it last seen in March 2008.

Wheat is one of the world’s two most important food stables, the other being rice, and the current explosive rally will continue to add pain to consumers around the world, specifically those in emerging market countries that can least afford it.

Russia and Ukraine supply more than 25% of the world’s wheat, and for now Ukraine export terminals remain shut. However, with Ukraine having already shipped two-thirds of its intended exports by November last year, the short-term impact should be limited, but worries will remain about  the upcoming season and the impact a prolonged war will have on the availability of farm hands.

Somewhat helping ease global shortages caused by drought and the war in Ukraine are news that Australia, another major shipper of wheat, upgraded its already record harvest by 5.5%. However, the prospect of a continued rise in global food price inflation remains real with the negative consequences it may have on stability and growth.

Gold and silver have both managed to hold onto the bulk of their recent strong gains, and following last Thursday’s 100 dollar top to bottom move support has now been established around $1880 from where it has since recovered, and at the current price of $1921 gold is heading for its highest close in 13 months. A world in turmoil continues to attract safe haven interest from investors with sanctions against Russia potentially increasing an already elevated risk to global growth. Thereby potentially turbocharging the reasons why we throughout have maintained a bullish outlook as inflation are likely remain higher for longer, thereby raising the risk of a gold supportive period of stagflation.

In the short term, the market will continue to look for direction from developments in Ukraine as well as any further news on sanctions and so far, futile talks between Russia and Ukraine. The prospect of a 50 basis US rate hike is off the table with the market reducing the number of rates hikes this year to less than six. While support has been established at $1877, the 50% retracement of the recent rally, a signal for further upside gains may emerge on a break above $1937. 

Source: Saxo Group
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