WCU: War and sanctions upend global commodity markets WCU: War and sanctions upend global commodity markets WCU: War and sanctions upend global commodity markets

WCU: War and sanctions upend global commodity markets

Ole Hansen

Head of Commodity Strategy

Summary:  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.

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% 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.

Traders are fully aware of this and what it does in the short term is to create even more volatility as liquidity and conviction levels drop. The average true range using a 14-day lookback period is one way of measuring volatility, and simply said, it tells us what kind of daily price range can be expected for any given stock or commodity, so the higher the volatility and uncertainty the bigger the range. Using the ATR measure we find Brent to have an expected daily range of $6.5/b versus $2/b in recent months, Paris wheat at €24/t versus €6/t and EU gas €32/MWh versus €7.5/MWh.

Global commodity markets are tightening and as a result the Bloomberg Commodity Spot Index continues to reach fresh record highs. The stunning 9.4% 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.

Apart from showing the spike in the Bloomberg Commodity Spot Index, the above charts also show different ways of measuring the backwardation which is now the broadest and highest in recent history. Measuring the spread between the first and second futures month we find that 15 out of 28 major commodity futures are currently trading in backwardation, while another measure shows the one-year roll yield on a weighted average of the components in the Bloomberg Commodity Index has reached a record 12% with the strength currently being carried by the energy sector, cotton and grains.

Copper, a rangebound market for the past year, burst higher this week to almost reach the record high from May last year at $4.89/lb. Since then copper has been trading sideways, thereby underperformed the Bloomberg Industrial Metal index by close to 25%. This during a time where other metals such as aluminum has reached a record high, zinc the highest since 2007 and nickel a 2011 high. Driven by supply disruptions from Russia as well as European smelters faced with punitively high energy prices cutting back production, thereby exacerbating acute supply constraints in the region. Russia is one of the world’s largest copper producers, and while the price for months has been held back due worries about Chinese demand, the focus is now turning towards a sanctions-led further tightness in supply, and with that the prospect of new record being reached sooner rather than later.  

Source: Saxo Group

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.

European gas briefly surged to €200/MWh and at current prices more than ten times above the long-term average we have reached levels that will see demand from heavy energy consuming industries begin to fall, the result being weaker growth on top of surging inflation. The biggest casualty of these developments was the ICE carbon futures contract which has slumped by one-third from the February peak. While signs of reduced demand for carbon offset was the trigger, the speed and depth of selling was driven by speculators exciting what up until recently had been considered a safe bet with prices only going up as EU politicians stepped up their battle against climate change.

Coal prices have more than doubled since the start of the year with Europe, Japan and Korea seeking alternative suppliers to Russian coal and power producers seeking substitutes to for Russian gas. In addition, coal production has faced challenges elsewhere with labor shortages in China and Mongolia, flooding across Australian mining regions, while a January export ban from Indonesia has been adding to the current tightness. 

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% above the previous record from 2008. Ukraine and Russia export 29% 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.

Source: Saxo Group

Gold and silver headed for the highest weekly close since November with demand being driven by safe-haven demand, not only from the Russian invasion but also as a hedge against inflation which has been turbocharged by surging commodity prices as well as the prospect for incoming economic weakness. Federal Reserve Chair Powell reaffirmed the central bank’s commitment to commence a series of hikes, starting this month, to curb the highest inflation since the 1980’s. However, the market shrugged off the news with Russian aggression potentially forcing a careful approach.

US 10-year real yields saw a gold-supportive collapse back to -0.9%, the lowest since early January, in response to rising inflation expectations and safe-haven demand at the same time driving nominal yields lower.

Besides the hard-to-quantify geopolitical risk premium currently present in the market, we maintain our bullish outlook in the belief inflation will remain elevated while central banks may struggle to slam the brakes on hard enough amid the risk of an economic slowdown. We believe the Russia-Ukraine crisis will continue to support the prospect for higher precious metal prices, not only due to a potential short-term safe-haven bid which will ebb and flow, but more importantly due to what this tension will mean for inflation (up), growth (down) and central banks’ rate hike expectations (fewer).

Arabica Coffee, a recent highflyer, dropped to the lowest since November with hedge funds reallocating some of their portfolio in response to the mentioned turmoil across markets. While the tight supply outlook from Brazil has not seen any improvement, the demand outlook has softened with Brazilian exporters cancelling contracts with Russia and Ukraine, thereby raising the availability for other destinations. As a result, we are seeing a small rebound in ICE-monitored stockpiles, further easing concerns – for now – of reserves being depleted.

Further reading:

IEA: A 10-Point Plan to Reduce the European Union’s Reliance on Russian Natural Gas
Saxo Market Call Podcast: Wheat price spike turning dire
Chart of the Week: Geopolitical Risk Index rises to a two-decade high
FX Update: Recession incoming with this latest energy spike
EU energy security could mean a comeback to coal using CCS

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article


The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.