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.