A return to social and economic normality, the latter aided by loose monetary and fiscal policies, and increased immunisation, have in 2021 alleviated not only sentiment but also the demand for commodities.

Recovering demand, supply chain related disruptions, government policy, and adverse weather conditions, all contributed to a tightening in markets, propelling prices higher. Some previously depressed, not only recovered, but also reached multi-year highs and all-time peaks. Heading into 2022, expectations, notwithstanding the possibility for prices to head lower as supply bottlenecks and imbalances improve, proved benevolent with commodity prices set to remain above long-term historical averages.

Other unprecedented factors, swaying (at least to date) the expected downward price trajectory, have however come into play. In recent weeks, tensions between Russia and Ukraine – as Russian military build-up on the border of Ukraine, straining bilateral relations – escalated. So, did the risk of a spill over effect into global commodity markets.

Russia being a key supplier of energy, metals, and agriculture has over the years proven itself as a commodities powerhouse. That said, the imposition of sanctions, enforced should Russia’s President Vladimir Putin support an invasion, has the potential to, once more, significantly tighten commodity markets.

While some commodities, notably; energy prices and industrial metals, consequent to Russia’s output started to already price in some of the geopolitical risk, uncertainty surrounding the future direction, remains. The potential impact largely depends on how the situation evolves and whether it translates into conflict.

From a commodity perspective, a scenario where the western world fails to react to a Russian invasion through the imposition of tough sanctions, the impact on commodities would somewhat be limited. Lingering uncertainty will still however drive prices higher.

The imposition of hard-hitting sanctions, notwithstanding assurances by the United States to help Europe find alternative supplies, shall impact Europe the most. This, as Russia remains the largest supplier of natural gas to Europe, albeit a recent decline in gas flows. Europe has in recent months felt that Russia is using high gas prices as leverage in a dispute over the Gazprom-backed Nord Stream 2 pipeline project, awaiting certification before it could bring additional Russian gas flows to Germany. Europe’s largest economy, Germany – heavily reliant on Russian gas flows – have already voiced their concerns on the possible impact.

Sanctions will inevitably also impact the price of crude oil and refined products. Being the second-largest oil producer and exporter after Saudi Arabia, Russia’s oil supplies prove crucial. With approximately a quarter of its oil imports coming from Russia, Europe will once again bear the brunt. China, a large importer of Russia’s oil supplies will stand to benefit from any potential action taken. Impacting a large share of Russia’s exports, notably to Europe, would likely push the global market into a deficit. This, being extremely bullish for oil.

WTI crude futures currently hover around $88 per barrel of oil, held up as tensions between Russia and the west intensified, and tight global supplies – as members of the OPEC+ struggle to keep up with the monthly increases in output. On Wednesday, OPEC+ agreed to boost the group’s production quota by another 400,000 barrels a day in March.

Price of industrial metals, notably palladium – used in vehicle catalytic converters and designed to reduce harmful emissions for engines running on petroleum – and aluminium, factored in such geopolitical tensions. On a year-to-date basis the price of palladium is up by more than 25 per cent, amid concerns over supply disruptions from Russia, the metal’s top producer. The price of the said metal remains below all-time highs witnessed in April, 2021. Also, aluminium prices remained elevated, on the back of tensions escalating and the possibility of sanctions on Russian aluminium producers, leading to a supply shortfall.

While the situation is relatively very fluid, the future price trajectory of commodities, particularly those where both the United States and Europe rely on Russia’s output, remains largely unknown. Most certainly, both sides stand to suffer should tensions lead to a conflict. Russia risks to ever gain certification for their Gazprom-backed Nord Stream 2 pipeline project and possible energy flows, while the United States and Europe risk, not only a gas supply shortage but possibly a spike in energy prices, possibly elevating inflationary figures, currently fenced at record highs.

Disclaimer: This article was written by Christopher Cutajar, credit analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.