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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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War In Ukraine Leads To Full-Scale Commodities Melt-Up

  • Crude, natural gas, aluminum, nickel, wheat, and a whole host of other commodities have seen extreme price increases in recent weeks.
  • Massive re-pricing in commodities is causing turmoil in global markets.
  • Energy Intelligence: Russian oil export flows have fallen by at least one-third - or some 2.5 million barrels per day.

Last week, oil and commodity markets recorded their biggest weekly gains in years as shuttering of Ukrainian ports, sanctions against Russia, and disruption in Libyan oil production sent energy, crop, and metal buyers scrambling for replacement supplies. Russia is one of the world's biggest exporters of key raw materials, from crude oil and gas to wheat and aluminum, and the possible exclusion of supplies from the country due to sanctions has sent traders and importers into a frenzy.

Crude prices spiked on Monday, and Brent Crude hit $130 on Tuesday again as the U.S. imposed a ban on the imports of Russian energy.  

Libyan oil production fell by 1.0mb/d from last Wednesday's high of 1.2mb/d, as militias shut key export facilities with oil prices set to continue the surge on Iranian nuclear talk delays. Russia has raised fresh demand for written U.S. guarantees that sanctions on Moscow over its invasion of Ukraine would not harm its cooperation with Iran. 

Americans are feeling the heat from the war keenly: during the first full week of Russia's invasion of Ukraine, the price of regular gas rose by almost 41 cents, with the price of regular gasoline breaking $4 per gallon (3.8 liters) on average across the U.S. on Sunday for the first time in 14 years. The $4 threshold is regarded as an unmistakable pain point for drivers, with $4.17 being the all-time high for gas prices after oil prices hit $145/bbl in the summer of 2008.

Meanwhile, aluminum hit a record high of $3,850 a tonne, up nearly 13% and heading for its largest weekly gain ever; the Chicago Board of Trade's (CBOT) most-active wheat contract spiked 40% this week, the biggest weekly gain on record, while corn was up 17% and soybeans added nearly 6%. Russia accounts for ~6% of global aluminum supply and exports around 35mt of wheat, or a whopping 17% of global export supply.

"We are seeing the commodity 'melt-up' continue with no sign of a let-up. More precisely, there is a massive repricing going on which will presumably stop when most, if not all, of Russia's contribution to the global supply/demand commodity chain is 'scrubbed' off the numbers and discounted by the markets," ED&F Man Capital Markets' Edward Meir has told Reuters.

But it's not just the commodities markets that are seeing a dramatic re-pricing. The U.S. dollar has been making strong gains at the expense of most major world currencies, with the Australian dollar and the New Zealand dollar being the notable exceptions. The dollar has been rising on the back of robust safe haven inflows as well as the Fed's tightening policy. Central banks around the world have been padding their global reserve currency holdings amid the geopolitical upheavals, with the Dollar Index now at two-year highs.

Self sanctioning

Although Russian energy exports are, at present, largely exempted from global sanctions, oil prices and energy stocks have been soaring after international refiners adopted a self-imposed embargo, with many reluctant to buy Russian oil and banks refusing to finance shipments of Russian raw materials. Refiners and banks are unwilling to do business with Russia due to the risk of falling under complex restrictions in different jurisdictions. Market participants are also concerned that measures directly targeting oil exports could soon come into place as fighting in Ukraine escalates.

"It's going to make trading with Russia very complex. These sanctions against Russia will have an incredible effect on global trade and trade finance," Sarah Hunt, a partner at law firm HFW who works with commodity traders, has told the Wall Street Journal.

The situation is getting desperate for the Russian oil sector, with oil exports falling sharply despite selling at massive discounts. According to Energy Intelligence, Russian oil export flows have fallen by at least one-third - or some 2.5 million barrels per day - despite a discount of $11 per barrel versus dated Brent being offered for distressed cargoes of Russian Urals.

Russia normally exports 4.7 million b/d of crude and 2.8 million b/d of products, according to government data. But Energy Intelligence now estimates that ~1.5 million b/d of crude and 1 million b/d of refined products are not making it to the market.

Other than the sanctions, European refiners are also reluctant to buy Russian oil due to its high sulfur content. Refiners prefer lighter grades since they need less treatment with expensive natural gas, thus allowing for higher margins.

By Alex Kimani for Oilprice.com

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Leave a comment
  • Steven Conn on March 08 2022 said:
    Yes, Russian oil exports have fallen by 1/3 but the price per barrel they are paid for oil has risen by 50%. And what of natural gas, coal, wheat, palladium, platinum, aluminium, nickel, and lastly the price of gold, which Russia produces and which its Central Bank has started buying again.
  • Steven Conn on March 08 2022 said:
    Yes, Russian oil exports have fallen by 1/3 but the price per barrel they are paid for oil has risen by 50%. And what of natural gas, coal, wheat, palladium, platinum, aluminium, nickel, and lastly the price of gold, which Russia produces and which its Central Bank has started buying again.

Leave a comment




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