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Alex Kimani

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

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Extreme Weather and Red Sea Crisis Trigger Commodities Rally

  • Extreme weather conditions, including heatwaves and droughts, are driving up the prices of commodities.
  • Shipping stocks have performed well this year, with some companies hitting 52-week highs.
  • Shipping companies have changed their strategy to attract more investors, including reducing debt and increasing dividend payouts.

After three years of extreme volatility, many experts predicted that commodities prices would broadly stabilize in 2024. However, adverse weather conditions, escalating geopolitical tensions and soaring shipping costs are turning those predictions on their heads. According to data gathered by the the United States’ National Oceanic and Atmospheric Association (NOAA), the European Union’s Copernicus Climate Change Service (CCCS), the United Nations World Meteorological Organization (WMO),  last year not only broke 2016’s heat record but shattered it by a wide margin. 2023 was 1.48°C warmer than the pre-industrial period, with global average temperatures at least 1°C warmer than pre-industrial averages on every single day. Well, 2024 could be even hotter, with the National Centres for Environment Information (NCEI) predicting a 22 percent chance that the current year will be the warmest year on record and a 99 percent probability that it will rank in the top five warmest years. NCEI data reveals that the first four months of the current year were the warmest in 175 years.

Wild weather driven by climate change is elevating the cost of energy, food and fuel; increasing the frequency of natural disasters and raising insurance costs. According to Munich Re, last year, extreme weather and earthquakes inflicted global losses of $250 billion, a new norm for insurers. These wild weather patterns--coupled with geopolitical tensions--have changed the outlook for certain commodities.  Gary Cunningham, director of market research at Tradition Energy, has predicted that U.S. natural gas futures could soar to $4 per million British thermal units later this year if the ongoing hot weather persists and increases cooling demand. That would mark a large 60% jump from the current Henry Hub price of $2.50/MMbtu. The same case applies to Europe. European natural gas prices held around €35 per megawatt-hour in the last week of May, close to a 5-month high amid expectations of lower supply and robust cooling demand. New weather forecasts anticipate hotter temperatures in Northern Europe at the beginning of June; aggressive heat waves in Europe later in the summer and excessive heat in France and Spain. 

This summer will almost certainly bring a rash of debilitating heat waves, particularly in the US midsection and Europe,” said Jennifer Francis, a senior scientist at the Woodwell Climate Research Center, has predicted.

Meanwhile, soaring temperatures in Asia have intensified bidding competition for LNG in major hubs, underscored by the 16.7% annual increase in imports from Japan in April. Europe now competes with Asia for LNG cargoes from exporters like the US, Qatar and Nigeria

However, ample reserves in European storages and added capacity in Norwegian gas fields are helping temper shortage risks.

Hot weather and dry conditions have triggered shortages of several agricultural commodities resulting in price spikes. Wheat futures have hit the highest since July, reversing bearish bets by hedge funds they held for almost two years. In North America, much of Kansas is still suffering from extreme drought, though harvests are expected to improve from last year when drought was so bad many fields didn’t make it to harvest. Still, with hot conditions prevailing more than a month before the harvest season kicks in, experts are warning that those rosier forecasts might not be realized.

It better start raining pretty quick to get these numbers,” said Dave Green, executive vice president of the Wheat Quality Council and leader of the crop tour.

Meanwhile, Citigroup analysts have predicted that extreme weather could see prices of Arabica coffee jump about 30% to hit $2.60 a pound over the next few months if adverse weather and production issues prevail in Brazil and Vietnam.

Shipping Bull Market

Shipping stocks have so far been the biggest winners in the energy sector. From tankers to dry bulk to containers to LPG, shipping equities are constantly taking out fresh highs. Indeed, with the exception of the pandemic, 2024 is on track to be the best year for shipping equities since the shipping supercycle in 2004-2008.

With shipping rates soaring, leading commodity shipping stocks are firmly in the green this year, and show no signs of slowing down.

Tsakos Energy Navigation (NYSE: TNP) and Teekay Tankers (NYSE: TNK) recently hit fresh 52-week highs, as did dry bulk carrier owners Genco Shipping & Trading (NYSE: GNK), Golden Ocean (NASDAQ: GOGL. TNP is now up 40.1% in the year-to-date; TNK has climbed 51.0%, GNK has gained 34.9% while GOGL has rallied 46.3%.

Tanker stocks have been more of a mixed bag: Scorpio Tankers (NYSE: STNG) is up 34.9% YTD; Frontline Plc (NYSE:FRO)+42.4%, Nordic American Tankers (NYSE: NAT) -1.2%, Euronav (NYSE: EURN)-3.9% while International Seaways (NYSE: INSW) has returned 45.3%.

Source: Drewry

According to Lloyd List, broad gains by shipping stocks can be chalked up to an improved operating model. In the pre-financial-crisis era of 2008, shipping companies featured highly cyclical revenues with heavy capital expenditures on newbuildings, equity sales to fund growth, full dividend payouts, and very high debt levels. However, they have mostly changed their playbook, especially larger spot-centric bulk commodity shipping owners. Mirroring the similarly retooled strategy of U.S. oil exploration and production (E&P) companies, shipping companies now have much lower debt to reduce break-evens, limited capital expenditures, more sustainable shareholder returns including dividend payouts, and share buybacks when stock prices are below net asset value (NAV).

 According to Clarksons Securities analyst Frode Morkedal, these changes have led to “a significantly more receptive investor market for shipping. Shipping stocks have made a significant turnaround this earnings season, outperforming the previous two quarters.” 

By Alex Kimani for Oilprice.com

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  • Mike on June 03 2024 said:
    oil prices

  • O Valdez on June 06 2024 said:
    According to Interfax, Russian news agency, Russia will cut-off 500000bopd effective June 1, this year. The cut-off will affect Europe and the Baltic and Black sea countries except Turkey. The cut-off is designed to counter the imposition of sanctions by NATO countries. Europe and theU.S. embargoed Russian oil in 2023, now Europe buys oil and LNG from theU.S., the Middle East and others at a higher price.

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