The escalation of the Russian-Ukrainian conflict has increased pressure on global commodity markets, and the nominal prices of some commodities have reached record highs and are producing a lasting chain reaction. However, the hot commodity market has been shaken this week by the market's sentiment over demand. At the same time, in different commodity markets, the market changes show obvious differences. Analysts believe that the short-term market high volatility will continue, once the situation in Russia and Ukraine eases, the commodity market or turn down.
Supply concerns support the high price run
Commodity markets continue to rise due to the disruption of global supply chains by the pandemic, exacerbated by the escalation of the Conflict between Russia and Ukraine. At present, global commodity prices are generally at historically high levels, and supply-side concerns have not fundamentally improved.
In the international crude oil market, Russia, one of the main oil producers, is deeply affected by the sanctions measures triggered by the Conflict between Russia and Ukraine. Russian Finance Minister Siluanov said on the 27th that in the case of international restrictions on the purchase of Russian crude oil, Russian oil production this year may drop by as much as 17%, and the exact amount will depend on foreign demand for Russian crude oil. Siluanov said Russia would try to steer the flow of crude oil to markets that are still interested in buying Russian oil.
Crude oil inventories are also not optimistic. Crude inventories rose just 692,000 barrels last week, lower than expected, while refined oil inventories, including diesel and jet fuel, fell to their lowest level since May 2008, sending U.S. heating oil futures to a record high of more than $4.67 a gallon, the U.S. Energy Information Administration (EIA) said. The Organization of the Petroleum Exporting Countries (OPEC), for its part, insisted that the driver of high oil prices was temporary, and therefore refused to increase production quickly, exacerbating concerns about supply shortages in the crude oil market.
In the gas market, Russia cut off gas supplies to two of its Eastern European neighbors, Poland and Bulgaria. On the evening of the 26th, the price of natural gas in Europe rose by more than 10%. It also caused fears that more European markets would be in trouble, pushing gas prices higher. According to the Wall Street Journal, the European benchmark natural gas price rose 4.1% on the 27th, settling at 107.43 euros per megawatt hour (about $114.28), which is lower than the high reached in March, but still about five times that of a year ago. As European gas prices rose, more U.S. natural gas was shipped to Europe, and the benchmark price of U.S. natural gas also climbed 6.1% on the 27th, settling at $7.27 per million British thermal units, significantly higher than the level of less than $4 at the beginning of the year. Usually, as the spring weather warms up, the price of natural gas falls.
In the grain market, Ukrainian official sources say that Ukraine's 2022 grain harvest may be about 20% lower than in 2021. Ukraine is the world's fourth-largest producer and exporter of agricultural products, and reduced supply will have an impact on global supply. In addition, the increase in the price of agricultural materials such as fertilizers has also affected spring sowing in some countries, and the disruption of food trade has inhibited the supply capacity of food in the global market. According to the Food and Agriculture Organization of the United Nations, world food commodity prices jumped sharply to record highs in March.
It is worth noting that since the escalation of the Conflict between Russia and Ukraine, there have been problems of poor supply chains and sharp rise in transportation costs around the world. In addition, global commodity markets are constantly being affected by more rapidly changing fundamentals, and the prices of important commodities are not only "high fevers", but also greatly increased volatility.
Multiple factors inhibit price growth
At present, the global commodity market price is already at a historical high, and the momentum for further rapid rise is obviously insufficient. Recently, concerns about fed interest rate hikes and reduced demand have also weakened the momentum of commodity prices to continue to rise to some extent, and some varieties have also adjusted.
Supported by high inflation, the market's expectations for the Fed's rapid interest rate hikes are becoming increasingly strong, and the dollar index has benefited from the tightening of monetary policy in the United States and entered an upward cycle since last year. On the 27th local time, the dollar index, which measures the dollar against the six major currencies, closed at 102.9540, continuing above 100. The strength of the US dollar has reduced the attractiveness of gold denominated in US dollars, and the trend of gold has been suppressed, and spot gold fell to $1886.20 per ounce on the 27th, but it is still at a relatively high level due to the support of the Russian-Ukrainian conflict.
The recurrence of the global epidemic has also caused overseas markets to continue to reduce global demand for metals. On the 25th, metal prices fell, of which the London Metal Exchange copper price broke through the $10,000 per ton mark; the international palladium spot price dived, the spot price fell 11% to $2,061 per ounce, and gold once broke through the $1,900 per ounce mark.
Oil prices have also retreated, adjusting from nearly $130 a barrel set by the escalation of the Russian-Ukrainian conflict to about $100 a barrel. Brent crude oil was priced at $103.40 a barrel on the 27th, but it was still supported by supply disturbances. Hancock, chief energy analyst at The French Foreign Trade Bank, said oil prices were constantly being pulled back to the bottom of around $100 a barrel, and the market could not maintain meaningful gains above that level.
In the Chicago agricultural market, corn, soybeans and wheat prices continue to run high. It should be noted that the price movements of these varieties have diverged. Corn prices continue to rise after a period of correction in March, rising more than 30% year-to-date. Wheat prices have begun to retreat after reaching a high in early March, and soybean prices have been fluctuating up and down for nearly two months.
The high volatility may continue
Looking ahead to commodity market trends, the World Bank's latest Issue of Commodity Market Outlook report said that the Russian-Ukrainian conflict has had a major impact on commodity markets, and the resulting changes in global trade, production and consumption patterns will keep global prices at historic highs until the end of 2024. Well above the average for the last five years. If the Russo-Ukrainian war is protracted or the sanctions against Russia are increased, the price level may be higher and more volatile than currently predicted.
The World Bank expects energy prices to rise by more than 50 percent in 2022 and then fall back in 2023 and 2024; non-energy prices, including agriculture and metals, are expected to rise nearly 20 percent in 2022 and also fall back in the years that follow. The average brent crude price is expected to be $100 per barrel in 2022, the highest level since 2013 and more than 40 percent higher than in 2021, before falling back to $92 a barrel in 2023, still well above the five-year average of $60 a barrel. European gas prices are expected to double in 2022 from 2021, and coal prices will rise by 80%, both at record highs.
According to a Wall Street Journal survey of analyst expectations, geopolitical tensions have overshadowed fears of slowing global growth and weakening demand, with crude oil prices set to remain around $100 a barrel for the rest of the year.
Based on the average expectations provided by the 13 major banks, the average brent crude oil price will be $99.96 per barrel in 2022, to $91.59 per barrel in 2023, and to $76 per barrel in 2024.
Goldman Sachs believes that due to the lack of investment and the lack of inventory buffers to cope with the huge shock, the super cycle of commodities will continue to advance and continue to look at various types of commodities. Goldman Sachs said that due to policy factors, primary energy capital expenditures have fallen by 35% since 2014, and capital expenditure commitments for long-cycle oil and gas projects have been reduced by more than half. This unbalanced policy could take years to correct.
Market analysts believe that the judgment of the trend of the global commodity market needs to distinguish between different markets and different stages. It is difficult to alleviate the situation in Russia and Ukraine in the short term, which also means that the bull market of commodities is difficult to end the risk premium state in the short term, and once the situation in Russia and Ukraine eases, these risk premium varieties will have a wave of rapid correction. If the inflationary environment coupled with weak market demand, the bull market in commodities will come to an end.
Source: Economic Reference Newspaper