Commodity prices surge on Russia’s invasion of Ukraine
The first quarter of 2022 saw commodity prices jump, with coal and natural gas leading the way higher as Russia invaded Ukraine.
The invasion sent a shock wave through financial markets, as the previous assumption that Russia could be a trusted partner in the world economic system was shaken to its core.
The biggest increases were seen in thermal coal and European natural gas prices, which rose 85% and 75% respectively in Q1, reflecting Russia’s critical role in the supply of these commodities. The EU is particularly exposed to this crisis because Russia supplies 70% of EU thermal coal imports and around 40% of its natural gas imports.
Other commodity prices also leapt in March. However, after the initial panic, there was a pullback, and an increase in the price of nickel (54%), Brent (39%), aluminium (24%), and palladium (18%) by the end of the quarter.
Brent captured many headlines, largely because it helps drive inflation and underpins the cost of many other commodities through input prices. With Russia being the largest exporter globally, it was not surprising to see prices become highly volatile. Spot Brent ranged from $89/bbl at the start of February to $128/bbl in early March, before falling back towards $100/bbl by early April.
While Russian oil is not being sanctioned, countries such as the US have imposed an embargo. In addition, many international companies, including oil traders, banks, and shipping firms, have stopped buying Russian cargoes. They fear being caught out by future sanctions and want to avoid the reputational damage that might arise from prolonging business with the country.
Even Chinese state-owned firms are self-sanctioning. Cargoes that have already been booked will be allowed to proceed, but new business with Russia has been largely halted. The International Energy Agency (IEA) estimates that in April, we might see Russian shipments cut by 3mb/day of oil, equivalent to 3% of global supply, at a time of exceptionally low inventory levels.
Given the severity of the current oil crisis, IEA countries have been forced to sell their strategic stockpiles. The US led the way on this, announcing in early April that it would sell 1mb/day of oil for the next six months (1% of global supply). Japan, Korea and the EU have also pledged to make sales.
While the OPEC+ group has spare capacity in places such as Saudi Arabia and the UAE (3.1mb/day), it has decided not to use it. Iran also has additional capacity of around 1mb/day, which it could use if US sanctions were eased.
The US is relying on domestic producers to pump more oil. The IEA is currently forecasting that US output will jump by 8% this year and that we could potentially see double-digit growth from the world’s largest producer.
The outlook for oil is unusually uncertain, but assuming that Russia and Ukraine reach an uneasy truce in the months ahead, prices are likely to fall back. What is clear, though, is that the war in Europe has severely damaged Russia’s reputation as a dependable energy supplier, and this is likely to force consumers to scale back their exposure as quickly as possible.
A greater push towards electric vehicles represents an attractive way of reducing reliance on oil, assuming energy can be sourced from alternatives such as renewables and nuclear power. Either way, while oil prices are buoyant for now, the industry’s fundamental position has been damaged by the recent price spike and lack of OPEC+ action to tackle shortages.
Oil prices are likely to trend lower in the year ahead as supply reacts to the spike in prices.