‘We’re Out of Everything’: Commodity Prices Soar in Wake of Ukraine–Russia Conflict

Barley crop is being harvested on the property in central-west New South Wales. Greg Wood/AFP via Getty Images

From gold to wheat to crude oil, it has been a wild ride for the commodities sector, with prices climbing higher amid the Russia–Ukraine military conflict.

A blend of tight supplies, interruption in global trade flows, lackluster production, and strengthening demand have contributed to the tremendous rally in a broad array of agricultural, energy, and metal commodities.

The Invesco DB Commodity Index Tracking Fund, which tracks 14 commodities, including crude oil, gasoline, silver, wheat, and zinc, has risen 23 percent year-to-date. In addition, the First Trust Global Tactical Commodity Strategy Fund, which monitors cotton, coffee, corn, nickel, and natural gas, has rallied by nearly 22 percent in 2022.

Before the military conflict in Eastern Europe, many Wall Street firms and analysts had predicted a commodities supercycle. The Ukraine–Russia war exacerbated an already tight segment of the international market, creating a situation in which there are limited stocks or shortages of a broad array of hard and soft commodities crucial to the global supply chain.

“We’re out of everything,” Jeff Currie, global head of commodities research at Goldman Sachs, told Bloomberg TV in February.

An oil pump is seen at sunset outside Scheibenhard, near Strasbourg, France, on Oct. 6, 2017. Christian Hartmann/Reuters

But is the situation in the international marketplace as severe as market analysts are prognosticating?

A Snapshot of the Commodities Boom

Crude oil prices have topped $110 per barrel, while natural gas is flirting with $5 per million British thermal units. The supply-demand imbalance was already pronounced, but fears of Western embargoes on Russian energy and President Vladimir Putin withholding oil and gas exports have added pressure to prices.

In addition, U.S. oil output has failed to return to pre-pandemic levels, producing about 11.5 million barrels per day (bpd), down from the peak of 13.1 million bpd. The Organization of Petroleum Exporting Countries (OPEC) and its allies, OPEC+, are sustaining their modest approach to reviving production. Europe imports more energy than it produces, increasing the European Union’s dependency rate to more than 50 percent.

Fertilizer prices have been soaring this week as global demand exceeds supply. Based on the movement of prices and the movement of companies, such as Nutrien and Agrium, markets are betting that the present situation could worsen.

Natural gas is used as a feedstock to manufacture two nitrogen-based fertilizers in immense volumes: ammonia and urea. One of the largest markets for various types of fertilizer is Russia.

The boom in copper, aluminum, palladium, and nickel is expected to linger for a decade, buoyed by falling supply and an increase in demand amid the world’s green energy transition. Moreover, Russia is a major supplier of these metals.

“Copper held on major exchanges is now at alarming levels, representing just three days of global supply,” ANZ strategists wrote in a note.

Wheat hit its highest level in about 14 years, with prices trading at “limit up” for two consecutive sessions. The May wheat contract hit $11.34 per bushel on the Chicago Board of Trade.

Grain has soared by about 47 percent year-to-date, buoyed by trade disruptions. Russia is the world’s largest producer of wheat, while Ukraine is the fourth-largest supplier. Moscow accounts for close to a fifth of the annual 207-million-ton global wheat trade.

Soybean has surged by 25 percent year-to-date, increasing to close to $17 per bushel. It has benefited from tumbling yields in Brazil as the past summer’s drought and heavy winter rainfall weighed on output levels.

Moreover, China, the world’s largest buyer of soybeans, has been booking enormous amounts of U.S. and Brazilian shipments, despite sky-high valuations.

Corn, coffee, orange juice, meat, and a whole host of food products have recorded exceptional gains in 2022. Overall, agricultural prices have been surging in 2022 on thin inventories.

This has some market analysts saying that this could lead to a significant food inflation development in 2022, in addition to the current pressures affecting prices. In January, the annual food inflation rate surged to 7 percent, according to the Bureau of Labor Statistics.

A gloved hand stacks bars of gold into a pyramid. Leonhard Foeger/Reuters

Gold and silver have risen by 5 percent and 8 percent, respectively, on safe-haven demand. Despite a stronger U.S. Dollar Index and rising Treasury yields, investors are purchasing the yellow and white metal to seek shelter from market volatility and geopolitical upheaval.

For now, there could be additional upward movement in gold prices.

“Technically, the April gold futures bulls have the solid overall near-term technical advantage. Prices are in a five-week-old uptrend on the daily bar chart,” Jim Wyckoff, a senior market analyst at Kitco, wrote in a note. “Bulls’ next upside price objective is to produce a close in April futures above major resistance at the February high of $1,976.50.”

Commodities Supercycle to Trigger Stagflation?

In recent months, Wall Street has been debating stagflation, a period of sluggish economic growth and soaring inflation.

Many first-quarter U.S. economic forecasts have highlighted lackluster expansion.

The Federal Reserve Bank of Atlanta’s GDPNow model points to a 0 percent gross domestic product in the January-to-March period. The Fed Bank of Philadelphia’s median Q1 Nowcast stood at 1.9 percent.

“The risks of stagflation have increased,” Carsten Brzeski, the global head of macro at ING, wrote in a note. “In the shorter run, disruptions to the energy and commodity supply will weigh on growth and push up inflation for longer.”

It will be challenging for central banks to maneuver policy should there be swelling economic implications from the Russia–Ukraine war, according to strategists.

“The higher and the more persistently higher inflation will, unfortunately, become the new global reality and a headache for many central banks, as they won’t be able to raise the rates sufficiently if the war [takes] a severe toll on the economic recovery, while boosting inflation,” Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, wrote in a note.

This month might prove to be pivotal for the U.S. economy, monetary policy, and commodities in 2022, as the Federal Open Market Committee (FOMC) meets and the Ukraine invasion evolves.