The Russian invasion of Ukraine, which began on February 24, has sparked a massive increase in prices throughout the commodities markets.

From oil and natural gas to metals and agricultural products, virtually all commodities have been driven higher by Russia’s advance, due to a combination of sanctions and anticipated supply shocks.

Oil on the rise

On Sunday, US Secretary of State Anthony Blinken said the US and its allies are considering an embargo on imports of Russian oil.

This suggestion appears to have lit a fuse when markets opened again on Sunday night, with Brent crude surging to over $125 a barrel during in trading on Monday.

As traders look to lock in purchases of Brent over Russia’s standard Urals oil, Brent continues to trade at a premium.

The lock out of Urals has thus far been extremely tight, with one UK-based consultancy, Energy Aspects, estimating that 70% of Russian crude exports are yet to find a buyer.

Moreover, the shipping industry has begun to self-sanction in anticipation of further restrictions on Russian exports.

On March 1, for example, the world’s three largest shipping companies – MSC, Maersk, and CMA CGM – announced that they have temporarily suspended shipping both to and from Russia.

It is worth noting that Russian shipping companies such as Sovcomfloft can still supply oil to willing buyers. 

And at auctions, there are still buyers willing to buy at discounted prices. Last week, for example, Shell bought 725,000 barrels of Ural oil from Trafigura at $28.50 less than Brent per barrel.

As of today, however, Shell has announced that it plans to withdraw entirely from Russian oil and gas exports, and has apologised for last week’s discount purchase.

“We are acutely aware that our decision last week to purchase a cargo of Russian crude oil to be refined into products like petrol and diesel was not the right one, and we are sorry,” said Ben van Beurden, CEO of Shell.

“As we have already said, we will commit profits from the limited, remaining amounts of Russian oil we will process to a dedicated fund. 

“We will work with aid partners and humanitarian agencies over the coming days and weeks to determine where the monies from this fund are best placed to alleviate the terrible consequences that this war is having on the people of Ukraine.”

Replacing Russia’s supply of oil

With Russian exports slowly being choked off, policymakers in the West are looking to increase the global supply of crude oil to help ease price hikes.

Last Tuesday, the US and other members of the International Energy Agency (IEA) said they will release 60 million barrels of their 1.5 billion supply of oil over 30 days. 

The IEA’s release of supply is the equivalent of about 2 million barrels per day, but in February alone, Russia exported 5 million barrels per day to the rest of the world. 

Even with increased production elsewhere in the world, bringing extra supply online is unlikely to exert much downward pressure on prices, at least not in the short term.

Scott Sheffield, CEO of America’s largest shale producer, Pioneer Natural Resources, said as much last week.

In an interview with FT, Sheffield said a ban on Russian oil and gas exports could send oil to $150, even $200 a barrel, and that it would take 6-8 months to start new drilling in the US to ease supply constraints.

As of March 5, US oil production stood at 11.6 million barrels a day, which is comfortably below its pre-pandemic high of 13 million barrels a day.

Russia responds to sanctions

In response to Western sanctions, Russia has – for the first time since the Ukraine crisis began – explicitly threatened to cut off natural gas supplies to Europe. 

The remarks, made yesterday by Russia’s Deputy Prime Minister Alexander Novak, moved markets today, with Dutch TTF natural gas up 18%, hitting a new all-time high of €227MWh.

In the West, dependency on Russian export of gas varies. In 2021, Europe imported over a third of its natural gas from Russia. Germany is a leading importer of Russian gas, with over a third of its national supply coming from Russia in 2021.

In 2021, about 15% of Germany’s power generation came from natural gas, and 12% from nuclear.

In yet another European energy policy blunder, Germany shut down three of its six nuclear plants in December 2021, and is scheduled to close the remaining three by the end of 2022.

This is in addition to the scrapping of the Nord Stream 2 pipeline from Russia to Germany.

Nickel’s erupts 400% after massive short squeeze 

Metals have seen record price increases since Russia’s invasion of Ukraine began, the latest – and most shocking – example being nickel.

Due to expected supply chain issues, and after the unravelling of a massive short squeeze, nickel today exploded to over $100,000 per tonne.

To put that in perspective, that’s about 400% higher than its average price of $22,355 per tonne from January this year.

The volatility led the London Metal Exchange (LME) to suspend trading of nickel while contracts are settled.

Russia’s role in the nickel market means a restriction in supply will heavily affect global prices,  as Russia produces about 7% of the world’s supply.

Wheat rallies to new highs

On the day of Russia’s invasion, the price of wheat jumped to $9 a bushel, and as of today, it reached an all-time high of over $13.

In 2021, Ukraine and Russia made up about one third of the world’s wheat exports, and increases in wholesale prices are expected to put further pressure on global food price inflation.

With fertiliser prices also set to increase, wheat will not be the only agricultural commodity to threaten food supplies in the developing world. 

In 2017, the US Geological Survey estimated that Russia made up 18% of the global potash market, and Scotiabank found that Russia made up 20% of global ammonia and 15% of urea exports.

Ammonium nitrate is likewise key in the production of fertilisers such as ammonium nitrate. 

Russia holds two thirds of the world’s ammonium nitrate production, and has already suspended  exports of ammonium nitrate until April 2022, according to S&P Global. 

In tandem with gas price increasing, the production of fertiliser will become increasingly costly, and people in developing countries where food makes up the largest percentage of household budgets will suffer the most.

Read our latest issue of Trade Finance Talks, May 2022

Issue 9