Commodity markets rising with the Ukrainian occupation: What will the coming months bring?

Russia’s sphere of influence continues to expand

Crude oil, natural gas and wheat supplies depend on Russia

Platinum group metals, aluminum, fertilizers and other commodities come from President Putin’s Russia

Trade embargoes, sanctions, and war break the basic supply-demand equation for commodities.

Commodities are global assets. Production takes place in the earth’s crust where metals, minerals and energy reserves are located. Agricultural products come from areas where climate, water resources and soil support crop growth. All businesses and the more than 7.877 billion people living on our planet need the raw materials necessary for daily life. Consumption, which gives strength to live, provides nourishment and shelter, is everywhere.

Commodity prices reflect economic and geopolitical landscapes, and geopolitical turmoil can significantly affect prices. The current Ukraine war poses a significant threat to world peace in early 2022.

Russia’s attack will ripple through global commodity markets like a tsunami causing price distortions in raw materials and markets across all asset classes.

Russia’s sphere of influence continues to expand

The Russian leader claimed that Ukraine remains an integral part of Russia and NATO enlargement threatens his country. After his speech, the Russian army entered eastern Ukraine. The United States and NATO see this move as an invasion, and sanctions against Russia are escalating as President Putin continues to push west towards the capital, Kiev. On February 24, Russian forces launched a large-scale offensive on all major Ukrainian cities.

Introducing troops into Ukraine is not the first clear Russian move to control regions that were formerly part of the USSR. In 2008, Russia took control of Georgia. In 2014, the Russian army invaded and then annexed the Crimean Peninsula, taking it from Ukraine.

In his February 21 speech, President Putin cited NATO enlargement, which threatens Russia, as the reason for sending “peacekeeping” troops to Ukraine. If success breeds success, the Russian leader can continue to reverse the dismantling of the Soviet Union.

Meanwhile, President Putin expanded his sphere of influence in other regions. With its support for Syria and Iran, it has been on the other side of the US-backed battle lines. In 2016, the Russians became OPEC’s largest non-member partner. Today OPEC+ cannot take any production decision without consultation and agreement from Moscow. With the US addressing climate change by supporting alternative and renewable energy sources at the expense of fossil fuels, pricing power in the world oil market is in the hands of the cartel, with Russia in a leadership role despite its non-member status.

At the 2022 Winter Olympics in Beijing, President Putin and President Xi agreed on mutual support that could neutralize US and European sanctions that will be imposed over the coming weeks and months. As a result, the Russian leader expanded his support and power base through unrivaled military actions and strategically planned alliances in the Middle East and Asia.

Crude oil, natural gas and wheat supplies depend on Russia

Russia is one of the world’s leading producers and exporters of crude oil and natural gas. Russia’s influence in OPEC policy only increases its power in the energy markets.

Inflation and the change in US energy policy have already increased the price of oil. The Brent criterion is the pricing mechanism for about two-thirds of the world’s oil production and consumption.

Brent crude oil Futures contracts were above $90 a barrel before Russian troops entered eastern Ukraine on February 22. Brent futures rallied as high as $105.79 a barrel after the full-scale invasion. US President Biden asked OPEC member Saudi Arabia to triple production since 2021, and the Saudis refused at every opportunity. Russia’s invasion of Ukraine and US-European sanctions could push crude oil prices to around $150 a barrel, for the first time since 2007.

Europe natural gas dependent on Russia for its supply. The sanctions are likely to cause disruptions as Russia uses the energy commodity as a political tool against economic sanctions. The US may seek to divert LNG shipments from Asia to Europe to alleviate the frustrations caused by Russia-NATO tensions. While the NYMEX natural gas futures market is primarily domestic, LNG shipments abroad make it more of an international market. The situation in Ukraine increases the sensitivity of the natural gas futures market to the geopolitical landscape.

The monthly chart shows nearby MYMEX gas futures sit above $4.80 per MMBtu on Feb. 24. Although they are down from a high of $7,346 in January, they remain well above the February 2021 high of $3,316 per MMBtu as the natural gas market approaches the historically weak start of the 2022 injection season.

Crude oil and natural gas provide power, while wheat is the critical ingredient for nutrition. Russia is the world’s leading wheat exporting country.

The monthly chart of CBOT soft red winter wheat futures, the benchmark for world wheat prices, shows the grain trading above $9.25 per sign on February 24. The highest value in February 2021 was $6,8350.

Wheat prices are rising due to the tensions with Russia and the Black Sea Ports being in the region where the military actions started. Moreover, Ukraine is an influential wheat producer, and the war in Ukraine threatens the 2022 wheat crop as fields could turn into battlefields.

Platinum group metals, aluminum, fertilizers and other commodities come from President Putin’s Russia

Russia is a leading producer of platinum, palladium, rhodium and other platinum group metals. The metals are by-products of Siberian nickel production from the Norilsk region, and Russia also supplies significant levels of nickel and aluminum, critical base metals. Fertilizers, which are inputs in agricultural production around the world, are also produced in Russia.

Russia is a commodities powerhouse that supplies energy, metals, minerals, agriculture, petrochemicals and supplies to the world, including the USA and Europe. The Russian invasion of Ukraine threatens supply shortages at a time when inflation and supply chain bottlenecks push prices to multi-year, and in some cases, all-time highs.

Trade embargoes, sanctions, and war always disrupt the basic supply-demand equation for commodities.

The US and Europe will protest Russia’s invasion of Ukraine with harsh economic sanctions. NATO members have promised President Putin debilitating sanctions that will affect Russia’s economy and cut off the flow of foreign currency. In turn, Russia could impose devastating trade embargoes, causing supply shortages in many critical commodity markets. War and sanctions will disrupt commodity prices and availability in the months ahead as they affect the supply and demand equations.

Meanwhile, due to the potential for hostilities in the high seas, it is necessary to expect freight rates to rise. It could also lead to a chain of events, including Russia’s move to respond to the US and Europe, China’s move to reunite with Taiwan, and more hostile actions from North Korea and Iran as they feel the weakness from the West.

Russia’s move to Ukraine comes at a time when inflation is at its highest in more than 40 years and supply chain bottlenecks related to the epidemic are causing commodity prices to soar. The Ukraine incident is simply fuel for the commodity bull market that could accelerate into over the next weeks and months.

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