Beware extraordinary headline risks in commodities

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.