In periods of low interest rates, high stock market prices and persistent inflation, the usually volatile commodity markets are once again in the sights of investors. This is also the case now, but this time there is another complicating factor: 100,000 Russian soldiers on the border with Ukraine, which the US president expects to invade the neighbouring country.
Oil prices hit a seven-year high on Tuesday, further driving up global inflation now that there is a chance demand for crude could outstrip supply later this year. ICE Brent, the international benchmark for the price of oil, rose nearly 2 percent to more than $88 a barrel on Tuesday. That is the highest level since October 2014, when the oil price hit USD115 a barrel. On Wednesday, the oil price closed at USD88.16 per barrel.
Ukraine conflict
Oil is peaking at a time when geopolitical tension is rapidly rising. Commodities giant Russia has stationed more than 100,000 troops on its border with Ukraine, an important transit country for gas to the EU. President Putin is demanding that NATO withdraw from the former Soviet Union’s sphere of influence. Russia is also pushing for a guarantee from NATO that Ukraine can never become a member of the defence community.
US President Biden said on Wednesday, on the first anniversary of his presidency, that he expects Russia to invade its neighbour. Biden held out the prospect of sanctions if his Russian counterpart actually put his money where his mouth is.
Warren Patterson, head of commodity strategy at ING, explained in a market commentary that a conflict between Russia and Ukraine could lead to disruptions in commodity flows. He added that the US and the European Union could become involved in this conflict and that new sanctions against Russia “could affect the supply of a number of raw materials to global markets”. These are also risks that he said are not currently priced into the market.
Russian equity market down
Nevertheless, the benchmark of leading Russian shares RTS index plunged more than 10 percent last week. This happened while rising commodity prices usually increase the value of the Russian stock market, which relies heavily on commodities. Investors sold risky assets that could be exposed to sanctions should Russia take military action against Ukraine. The market does not seem to be deaf to the political tensions.
According to Hans van Cleef, energy economist at ABN Amro, Russia is using the gas supply as a political weapon. “Although they are still honouring the contracts they signed with the EU, they are delivering less than they could. We have historically low supplies and winter is far from over,” he told Fondsnieuws.
Patterson’s comment that the financial markets are not yet pricing in the risk of a conflict is not shared by van Cleef. “Markets do price it in. Hedge funds are going long on gas and the price is rising quickly. “
Shortages
“If it starts freezing in Europe or Asia, things will get really exciting”, said van Cleef. “Then the demand can no longer be met and we will have real physical shortages. Scenarios are already being drawn up to determine which sectors will be scaled down, and in what order, in the event of a gas shortage.”
Van Cleef also said he sees increasing shortages in the oil markets. According to him, this is partly a result of disinvestment. “Oil and gas are not very popular anymore. Renewable energy is, but we are running up against technical limits. The question is whether we will be able to meet global demand in the coming years. That will be exciting.”
“Dutch energy policy is based on affordability, reliability and sustainability. Much has been invested in the latter, but now you see in the gas and oil markets that the supply is coming under considerable pressure. We are closing coal and nuclear power plants and want to replace them with solar and wind energy. In doing so, we are running up against technical limits and so, for the time being, we remain dependent on energy imports from countries such as Russia.”
Van Cleef also said he sees shortages on the metals market, which is extremely important to steer our energy transition in the right direction. “If you look at the security of energy supply in the near future, it will be very exciting,’ he said.
Green transition drives commodity super cycle
Goldman Sachs recently issued an expectation that the oil price could rise to 100 dollars a barrel. According to the merchant bank, this will happen against the background that oil production will rise to a record high in 2023, announced the International Energy Agency (IEA) in a new report. With higher prices, shale producers are also starting to produce more. This could jeopardise the objectives of the Paris Climate Agreement. At the same time, one commodity that is not much talked about at the moment is copper, although it is extremely important for the green transition, which is the main driver of a commodity super cycle according to Goldman Sachs. The metal experienced a huge rally in 2020 and has now been in a consolidation phase for some time. Reports of a supply shortage are increasing.
This was part 1 of a two-part series on developments in the commodities market. The second part will be published on Friday.