Unprecedented events push commodities to record highs

The ongoing tragic events unfolding in Eastern Europe, namely Ukraine – suffering solely because of the sovereignty’s right to progress and protect its nation, have shocked financial markets. Sovereign yields in both Europe and the U.S., previously heading higher amid expectations of a tightening policy cycle, reversed. Equity markets, witnessing a sector rotation towards value rather than growth, dropped. Commodities, fronted with the possibility of further supply issues, soared. 

The issue with supply disruptions and thus supply-demand imbalances within commodity markets isn’t merely an idea we’ve just been faced with. The unprecedented coronavirus pandemic which took the world by storm also put us through something similar. That time however was accompanied with an increasing level of demand spurred on by, predominantly China - the first to recover from the pandemic owing to its zero-tolerance stance - and its moves towards a return to normality and revitalization of its economy. Prices of industrial metals such as Iron Ore and Steel surged. A resumption proposition, aided by substantial stimulus, a widespread vaccination roll-out, and drive towards a greener world, alleviated not only sentiment but also continued to increase demand. This gave rise to the notion of a commodity super cycle. 

The scenario we’re currently faced with, driving prices to record highs somewhat varies. 

Russia being a key supplier of energy, metals, and agriculture has over the years proven itself as a commodities powerhouse. That said, the imposition of sanctions, enforced following a Russian invasion and conflict with Ukrainian military and citizens, have significantly tightened commodity markets. 

Ban on Russian oil and gas imports set to punish Putin 

Being the second-largest oil and gas producer and exporter, Russia’s role, particularly to Europe – substantially more reliant than both the U.S. and the UK - proves crucial. An oil and gas embargo, albeit discussed, was however certainly off the table. 

In attempt to isolate President Putin and Russia’s importance, as an energy supplier, strong decisions were taken. On Tuesday, President Joe Biden banned imports of Russian oil and gas into the U.S. as Washington steps up economic sanctions on Moscow over the invasion of Ukraine in an attempt to deprive it of revenue. The move was matched by Boris Johnson giving the heads up for a UK phase-out of Russian oil imports by the end of 2022. The single-currency bloc, as expected, did not follow suit. Instead, the EU outlined a plan to cut Russian gas imports by two-thirds within a year as it seeks to reduce its dependency on the country’s fuel supplies, through an increase in imports of liquefied natural gas, boosting renewable energy generation, and reducing demand with efficiency measures.

Currently, Russia supplies 25 per cent of Europe’s crude oil and 40 per cent of the bloc’s gas with Germany, Italy, and several central European countries particularly reliant. 

While oil prices have gained more than 30 per cent since Russia invaded Ukraine amid fears of further supply disruptions, such decisions drove prices higher to around $126 per barrel of oil. EU natural gas prices have however headed lower, to below €200 per megawatt-hour on Wednesday, slipping more than 40 per cent from a record high of €345 reached at the start of the week, amid prospects that the EU could quickly cut its dependence on Russian gas.

Commodities crucial to a green energy transition surge    

Price of industrial metals key to the green energy transition, used amongst others in the production of battery electric vehicles, solar panels, and wind turbines, have since such geopolitical tensions rose, surged. 

The price of Palladium – used in vehicle catalytic converters and designed to reduce harmful emissions for engines running on petroleum – has on a year-to-date basis shot up by more than 60 per cent, amid concerns over supply disruptions from Russia, the metal’s top producer. At one point, Palladium futures traded at an all-time high of around $3000 an ounce. Russia accounts for 40 per cent of the global production and the metal is always transported by planes. Due to the sanctions, airspace is in many countries closed for Russian planes.

Aluminum, notwithstanding a correction to around $3,550 per tonne as investors unwound some long positions following a massive rally from a record level of $4,100, remains above historical averages amid strong fundamentals, which continue to be supported by fears of further supply-chain disruptions and low inventories. The world’s largest shipping lines suspended cargo shipments to and from Russia in response to Western sanctions.

Nickel, used in stainless steel and electric-vehicle batteries, traded briefly above the $100,000 mark for the first time ever and almost tripled in value during Tuesday and Wednesday trading session as Western sanctions sparked concerns over supplies from Russia. The unprecedented and largest-ever move led the London Metals Exchange (LME) to suspend trading. Prior to such rally, Nickel was already trading higher on tight supplies. Russia produces 17 per cent of the world’s top-grade Nickel. 

Grain prices at multi-year highs

The sad events unfolding in Ukraine - a grain exporter - have brought the issue of food security to centre stage. Disruptions to supply chains has pushed grain prices to multi-year highs. The supply outlook remains unknown with prices set to remain elevated and volatile. 

After reaching a 14-year high of $12.8 per bushel, Chicago wheat futures cooled to around $11. 

Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018. For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.