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Supply risks may keep commodity prices higher, unless resolution to Russia-Ukraine conflict

With persisting Russia-Ukraine tensions and no signs of any efforts to resolve the issue, market players expect US and other countries to keep pressure on Russia and this has kept commodities supported even if they are off the highs.

February 26, 2022 / 07:57 AM IST

We saw sharp volatility in financial markets this week - thanks to the Russia's aggressive move towards Ukraine. Commodities were in limelight as many surged to multi-month highs on supply risks, as Russia is a major player in the commodity market.

On the energy front, Russia is one of the biggest crude oil producers along with the US and Saudi Arabia with production from Russia at about 10 percent of the total global output. Russia also provides around 30-40 percent of gas supply to Europe. On industrial metals, it accounts for 10 percent of global nickel supply, 6 percent of aluminium supplies and 3.5 percent of copper output. Russia also produces 40 percent of global palladium output and has a 10 percent share in global platinum production. On agri front, Russia and Ukraine are major wheat exporters, corn and sunflower oil (based on Reuters report).

With Russia linked with so many commodities, we saw a sharp upside move on Thursday as market players feared that increased tensions may impact supply. Crude oil surged to fresh 2014 high, European gas prices jumped to December 2021 high when it set all-time highs, aluminium surged to fresh record high level, nickel jumped to 2011 high, palladium tested June 2021 highs, platinum jumped to June 2021 high, US wheat hit their highest in nearly 14 years while corn hovered near an eight-month peak.

Also read: In crude's Russian roulette, India among top 3 losers in Asian economies

Amid other commodities, gold jumped to September 2020 highs amid increased safe haven demand and inflation concerns. Zinc prices also rallied on worries about the European energy crisis.

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Market players fear that increased tensions between Russia and Ukraine may cause western countries to impose tighter restrictions on Russia which could hamper trade activity and thereby production. Additionally, rising energy prices may also impact production activity.

Market reaction, however, subsided as US and other western countries have so far refrained from targeting any particular sector. Meanwhile, the US has maintained that it will take steps to keep the global energy market well supplied.

With persisting Russia-Ukraine tensions and no signs of any efforts to resolve the issue, market players expect US and other countries to keep pressure on Russia and this has kept commodities supported even if they are off the highs. While market focus remains on supply side risks, a widespread conflict and increasing tensions between world leaders may not bode well for global economic activity, which could hamper demand growth as well.

Rising commodity and energy prices may worsen the inflation situation hampering economic activity. Rising inflationary pressure may also cause central banks to take measures to control prices which could also impact economic growth.

Overall, unless there is a resolution to Russia-Ukraine conflict, supply risks may persist and this may keep commodity prices higher. However, if risk sentiment weakens significantly then all asset classes may be impacted including commodities.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.



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Ravindra Rao Ravindra V Rao is the Head - Commodity Research at Kotak Securities.
first published: Feb 26, 2022 07:57 am
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