(Bloomberg) — Commodities are heading for a manic start to the week as investors scramble to assess how the West’s latest sanctions on Russia — and an intensifying war in Ukraine — will affect flows of energy, metals and crops.
Western nations agreed to sweeping new curbs that will penalize Russia’s central bank and exclude some others from the SWIFT messaging system, used for trillions of dollars worth of transactions around the world. One White House official said the administration is looking to exempt energy sector transactions from the latter measure.
The announcements from the European Union and the U.S. are another dramatic escalation in a conflict that’s roiling raw materials through supply snarl-ups and the prospect of profound shifts in the geopolitical landscape. Oil breached $100 a barrel last week, aluminum hit a record high, and grain prices surged.
The attack on Ukraine is Europe’s biggest crisis since World War Two, and a major threat to the continent’s energy security. The jump in prices of commodities — Bloomberg’s gauge hit a record — will add to inflationary pressures, so expect more talk of demand destruction and economic damage.
What’s Next for Oil?
The coming days are fraught with event risk for crude, even aside from the sanctions fallout. There’s a midweek meeting of OPEC+ on output; the Biden administration may tap stockpiles; and Iranian nuclear talks look to be nearing a conclusion. On top of that, American crude inventories at the key Cushing hub could sink to the lowest since 2014 if there’s another modest draw.
Goldman Sachs Group Inc. said that despite the rally in prices, it’s unlikely OPEC+ will choose to quicken the pace at which the alliance has been restoring supplies, citing Russia’s “essential role” in the grouping. Both the OPEC+ meeting on Wednesday, and the latest government snapshot of U.S. crude holdings and demand the same day, will be covered by Top Live blogs.
Europe’s Energy Crisis
Europe gets more than a third of its gas supply from Russia, and big price spikes in the aftermath of Russia’s attack testified to jitters around what the immediate future will bring. Conflict in the east comes with the continent already facing spiraling energy costs. Even as Moscow’s forces pushed further into Ukraine, Europe’s top energy companies were hurrying to buy more Russian gas.
The gas market will become “even rockier” in the aftermath of Vladimir Putin’s aggression, according to BloombergNEF. While Russia is unlikely to choke off supplies to Europe for a prolonged period, it’s something that can’t be ruled out — especially if sanctions are ratcheted up.
Yellow Haven
In the immediate aftermath of Russia’s invasion, investors rushed to bullion in a flight from geopolitical tumult and economic risks. The precious metal hit a 17-month high before retreating as the first batch of Western sanctions on Russia were viewed as underwhelming. This might make gold a good early gauge on Monday of how markets see the latest measures.
Gold Extends Drop as Traders Weigh Ukraine War, U.S. Sanctions
On the one hand, there’s an argument that the addition of a European war to soaring commodity prices is a recipe for a wider growth slowdown. If that happens, the recent flow of ETF investment to gold — even before Thursday’s escalation — might become a rising tide, helping to boost prices. However, there’s also a school of thought that bullion will fall back to earth once the dust settles and investors go back to focusing on rising U.S. interest rates.
Upsetting the Breadbasket
Global inflation could hit an all-time high when the United Nations comes out with its latest monthly snapshot on Thursday. Consumers are already grappling with soaring food costs after drought and labor shortages slashed harvests around the world at a time of rising demand. Now prices of grains and cooking oils have taken another powerful leap upward following the invasion of Ukraine, a country that’s been labeled the breadbasket of Europe.
Wheat jumped to a 13-year high, raising bread costs, while soybean oil and palm oil, used in everything from chocolate to instant noodles, surged to records. Corn and soybeans also rallied. Ukraine’s fertile soils have made it the second-largest global grain shipper and a major sunflower oil exporter. But the invasion is shuttering ports and railways, leaving traders struggling to book vessels. Russia is also a top supplier of wheat and sunflower oil.
Metals Mayhem?
Investors will be waiting to see how the latest sanctions affect trade in metals like aluminum, nickel and palladium where Russia is a major producer. Just as in energy, the U.S. seemed unwilling for now to directly disrupt Russian supplies. That could be a lesson learned from 2018, when curbs on Russia’s top aluminum producer sparked months of market chaos. Consequently, the metal’s surge to a record lost some momentum on Friday.
Even without direct sanctions on producers, there will still be an impact from the financial restrictions that have been announced. There’s already signs that banking curbs are scaring buyers and trade financiers away from Russian businesses. That could snarl supply chains and fuel more volatility. And with aluminum tight as it is, don’t rule out new records — or even a march toward $4,000 a ton.
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