The Bloomberg agriculture index continued higher and reached a fresh 5-1/2-year high with gains being led by soybeans which climbed to their highest since June on a combination of tight supplies of global vegetable oil, prospects for a smaller harvest than expected in South America as well as high fossil fuel costs increasing the attraction of crop-based fuels such as bean oil.
Wheat futures, especially the high-protein contract traded in Paris, also witnessed a weak of raised volatility with the market worrying about the impact on supplies from heightened tensions between Russia and Ukraine, two of the world’s biggest shippers of the grain. Along with robust demand from countries such as Egypt, Turkey, Algeria, as well as China, a disruption could trigger a further price spike.
In addition to rising fossil fuel prices supporting demand for biofuels, the potential for lower production this summer from surging cost of fertilizers remains an additional challenge and one that may continue to support the highest food inflation in 14 years. In Europe, the energy crisis is leading the continent directly to a fertilizer crisis where punitively high prices or even lack of supply may force farmers either to use less nutrients, leading to lower production, or pass on the costs to the consumer. Europe has been the hardest hit by fertilizer-plant cutbacks driven by soaring costs of gas, a key input to the production process.
Crude oil’s month-long rally extended further with Brent reaching $90, a level last traded seven years ago. The rally continues to be fed supporting news, most recently the geopolitical risks driven by the Russia-Ukraine crisis, and the result being a very tight market where supply is struggling to keep up a demand that has seen a limited impact from surging Omicron cases around the world.
The OPEC+ group of producers meet next week to set their production targets for March. This at a time where the market has grown increasingly worried that the OPEC+, despite signaling higher output, will struggle to meet their targets. For several months now we have seen overcompliance from the group as the 400,000 barrels per day of monthly increases was not met, especially due to problems in Nigeria and Angola. However, more recently production challenges have seen several other countries, including Russia, fall short of their targets. We expect the group will signal another 400,000 barrels per day rise for March but as per usual traders will be more focused on the level that can actually be produced.
Global oil demand 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 even higher prices. This supports our long-term bullish view on the oil market as it will be facing years of under investment with oil majors diverging some of their already-reduced capital expenditures towards low-carbon energy production. One caveat being upcoming earnings announcement from major US shale oil producers where the market will be looking for signs of rising production.