Monthly Market Commentary

March 1st, 2022

Russia-Ukraine Conflict and its Effect on Commodities

Philip Blancato, Chief Market Strategist, Advisor Group

The beginning months of 2022 saw energy and other commodity markets rally to prices not seen in over a decade. Though the possibility of exceeding $100 per barrel seemed farfetched just a few short months ago, Brent Crude futures currently hover around $128 per barrel, while West Texas Intermediate (WTI) sits at a slightly lower $123 per barrel. 1 Brent crude functions as the global benchmark and product of reference for nearly two-thirds of all oil contracts traded. The slowly widening Brent vs. WTI spread likely reflects the deteriorating situation in Ukraine, discontinued purchases or outright banning of Russian oil by corporations and countries alike, as well as the comparatively insulated WTI market in North America.

Elsewhere in commodities, prices for wheat and nickel have reached their highest levels ever, corn is up more than 25%, and aluminum made a decade-long high.1 Continued and escalating conflict between Russia and Ukraine, who together produce nearly a quarter of the world’s wheat and function as key suppliers of barley, seed oils, and corn, will continue to put stress on commodity markets. Since the conflict began, Ukraine’s wheat and grain exports have dropped precipitously, most notably in the Black Sea trade area, the primary route by which wheat is sent to many emerging markets. Some trading partners, like Egypt and Turkey, import most of their grain via Black Sea Trade. But perhaps most critically, Russia is the largest provider of natural gas to Europe, fulfilling nearly 41% of the continent’s demand.2

Furthermore, Russia’s significance in global oil markets as the third largest exporter – accounting for roughly 10% of global demand – will only exacerbate the already dramatic surge in commodities prices. Sadly, Vladimir Putin seems determined to continue this war despite extensive sanctions aimed at crippling the Russian economy levied by the United States and other NATO countries. While sanctions may be effective, they take time to achieve the desired result. In an attempt to accelerate those effects, the US along with other NATO and global partners moved to ban the import of all Russian oil. According to the Energy Information Agency (EIA), the United States imported nearly 672,000 barrels of oil a day from Russia last year.3 Even before the ban was officially announced, the pain of elevated oil prices could be felt at the pump. AAA reports the average price for a gallon of gas in the United States is $4.31, compared to $3.47 per gallon just last month – a 24% markup in a few weeks’ time.4 Increasing gas prices are akin to a tax on the consumer, and for those that commute to work every day, it is almost impossible to avoid the effects of an increase in gas prices. Aggregating the recent surge in gas prices along with other elevated commodities and more general widespread inflation, current forecasts estimate consumer discretionary spending will decrease by roughly $75 billion this year. The jump in energy prices should impact major inflation indices such as the Consumer Price Index (CPI) and the Producer Price Index (PPI) in the coming months, and we expect some sharp spikes higher and potentially greater divergence in headline and core measures. The Federal Reserve is expected to raise interest rates in their March meeting, and it will be important to examine any changes in statement language or pivots in macroeconomic outlook as pressure to curb inflation mounts.

Chart 1 – 5

This unnecessary aggression inflicted on the Ukrainian people is sending ripples beyond the battlefield, which are gaining strength through commodities markets, and will ultimately crash on the global economy. However, to provide some context, although Russia can boast the world’s 11th largest economy by GDP, Germany produces three times the economic output with half the population, so the significance of the former Soviet superpower on an international level is somewhat limited. The fact remains, these countries are major producers of some of the most sought-after commodities across the world. Their major exports reach many countries who rely on them for necessities like food and fuel. For the sake of those directly affected by this conflict, the world waits and hopes for this to end quickly and peacefully. Unfortunately, that outcome appears less likely with each passing day, and from an economic standpoint, a prolonged conflict in Ukraine could usher in an extended regime of heavy sanctions against the Russian economy. Not only do sanctions require time to take effect, but their political nature makes them difficult to ease, as well. An Eastern Europe entrenched in war could have long-lasting effects on commodity markets, likely persistent, elevated volatility, and potentially an extended period of above average prices.

Economic Definitions

Producer Prices – PPI (headline and core): Producer prices (output) are a measure of the change in the price of goods as they leave their place of production (i.e. prices received by domestic producers for their outputs either on the domestic or foreign market).

CPI (headline and core): Consumer prices (CPI) are a measure of prices paid by consumers for a market basket of consumer goods and services. The yearly (or monthly) growth rates represent the inflation rate.

Brent Crude: Brent Crude may refer to any or all of the components of the Brent Complex, a physically and financially traded oil market based around the North Sea of Northwest Europe; colloquially, Brent Crude usually refers to the price of the ICE Brent Crude Oil futures contract or the contract itself.

West Texas Intermediate (WTI): West Texas Intermediate can refer to a grade or a mix of crude oil, and/or the spot price, the futures price, or the assessed price for that oil; colloquially WTI usually refers to the price of the New York Mercantile Exchange WTI Crude Oil futures contract or the contract itself.


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1 Bloomberg (as of 3/8/2022)
2 https://www.cnbc.com/2022/02/24/why-europe-depends-on-russia-for-natural-gas.html
3 https://www.reuters.com/business/energy/us-imports-russian-oil-refined-products-2022-03-08
4 https://gasprices.aaa.com/?state=US
5 Chart 1: Goldman Sachs Investment Research

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