Gas, Food and Metals

Question:  What are your thoughts on how the Russian/Ukraine war is impacting prices of commodities such as oil, metals, and grains? 

Answer:  As this is being written, it is day 19 of this horrific war. Although Russia and Ukraine represent approximately only two percent of the global economy, combined they provide large percentages of essential key commodities including grains, energy, and metals to the world. The longer the crisis continues, the greater the fallout pushing inflation and prices higher as companies face higher input costs.

As a teenager in the 1970’s, I remember hour-long gas lines and monitoring “odd and even” numbers on license plates as a way of rationing gas at what were seemingly astronomical prices. During the seventies, we imported 35 to 45% of our oil. Today, approximately 7% comes from Russia. In addition, we now have a strategic oil reserve stockpile that didn’t exist then.

Oil prices hit $123/barrel during the week ending March 11, 2022, presumably pricing in a worst-case scenario in supply reductions. The United States purchases 600,000 barrels of oil per day from Russia which is less than the amount bought by Germany or the Netherlands. This explains the limited scope of the US embargo. The United Kingdom is currently the only European country to announce a policy like ours in imposing embargos on oil imports. 

Russia supplies over 40% of the European Union’s (EU) natural gas representing a portion of the ~$1 billion that Russia receives daily from exports to Europe. The International Energy Agency (IEA) stated that Europe could replace more than half of its Russian gas this year. If action is taken, this resource shift could have a lasting and significantly negative impact on the Russian economy.

Higher prices on many commodities will increase inflation and erode consumer purchasing power. Nickel is one essential commodity that Russia may stop exporting. This fear drove prices to double and rise above $100,000 per ton. At that time, the London Metal Exchange halted trading of nickel because of the chaos. The rise in nickel prices tends to be reflected in the cost of bigger one-time purchases like electric vehicles and appliances. Prices of palladium and aluminum also escalated. This is an example of something trading based not on supply, demand, and valuation, but rather on fear. Unfortunately, metals shortages may further disrupt supply chains as it takes time for companies to secure other suppliers or alternatives.

Ukraine and Russia combined produce 30% of the world’s wheat. Prices have risen to the highest level in 14 years. Russia’s planting and harvesting seasons are likely to remain stable, but it’s unlikely that Ukrainian farmers will be able to plant, harvest, and ship their crops. Ukraine’s key exports including corn, barley and sunflower seeds must be planted in April. Farmers are either joining the fight or seeking refuge, while many farms are being destroyed as Russian troops advance. In addition, Russia has 'temporarily' suspended fertilizer exports. There is also the fear that the final product will not be able to be shipped because Ukraine’s infrastructure and shipping routes are either damaged or under attack; shortages could start as early as this summer. These grains are used for human consumption as well as for feeding livestock. Ukraine, known as the European breadbasket, is responsible for roughly 14% of Europe’s grain imports and the effects will be pervasive.

Expectations of lower consumer discretionary spending, higher commodity prices, inflation, higher interest rates and the headwinds of war will likely result in slower economic growth. 

The path of the Russia/Ukraine War is an obvious influence on oil prices and inflation.

To be sure, the degree and duration of Russian escalation are unknowns that can change rapidly and have large implications on economic growth, inflation, and interest rates, along with complicating the Fed’s situation. The war has created a humanitarian crisis. We hope and pray that a peaceful resolution comes to Ukraine sooner than later. Markets are closely watching for any shifts or signs of resolution or negotiations in the Russian war. Stay focused and plan accordingly. 

The opinions expressed are those of the writer as of March 7, 2022, but not necessarily those of Raymond James and Associates, and subject to change at any time. All investments are subject to risk, including loss. Diversification does not ensure a profit or protect against a loss in declining market. This material is provided for educational purposes only. Past performance is no guarantee of future results. There is no assurance the trends mentioned will continue or that forecasts discussed will be realized. Economic and market conditions are subject to change. Material is provided for informational purposes. Consult your tax professional and financial advisor before making any investment decisions. Holding investments for the long term does not ensure a profitable outcome. The foregoing is not a recommendation to buy or sell any individual security or any combination of securities

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