The Invasion of Ukraine is Accelerating the Supercycle in Commodities

Published on17 Mar 2022
Commodities Europe

The article below is from our BRIEFINGS newsletter of 17 March 2022

As the war between Russia and Ukraine escalates, global commodities markets are going through the most upheaval since the 1973 oil embargo on the U.S. But this time the energy crisis is most acute in Europe, which relies more heavily on Russian exports. And the shock isn’t confined to one commodity. Russia is the second largest commodity producer in the world (behind the U.S.), and the repercussions of its invasion seem to have changed global supply chains overnight. We sat down with Goldman Sachs’ Global Head of Commodity Research Jeff Currie for his view on global commodities and the impact on markets.

It’s around three weeks since Russia invaded Ukraine. Can you summarize the impact this has had on global commodity markets?

This is the biggest upheaval for commodity markets since 1973. But the comparison ends there. Other than this being a Europe centred shock, the other key way this crisis is different from the 1973 oil embargo is that this isn’t just a shock to oil supply. It’s a shock to every single commodity: grains, oil, gas, metals, palladium, titanium, and neon. The list goes on. We have never seen anything like this before. Another big difference is that 1973 was a seller-boycott. This is a buyer boycott. Apart from the actual war, you also have an economic war in the sense that you have a decoupling between Russia and the West. The actual physical decoupling – which will be seen in the commodity space – hasn’t even really started yet. We have seen the boycotts but the actual transition to do this is going to be a very painful process and difficult to physically achieve.

In addition to this physical decoupling, the financial decoupling is starting to impact commodity markets, too. There has been a sharp drop in the prices of many emerging market and Russia related assets, leaving investors facing large margin calls. To fund these, they must take profit on the only positions in the black: commodities. This has led to a fall in total interest in the space, as well as a fall in prices – a clear sign of de-risking unconnected to fundamentals. Such profit taking only enhances the volatility now present in commodity markets.

Could you break down what this means for each commodity?

Let’s start with gas. We haven’t seen much disruption at this point in time. As it goes down pipelines from Russia to Europe and not on ships we still don’t anticipate a similar disruption. But the market is pricing in something like a 75% chance of that happening, just because it would be so catastrophic. If it did happen, you’re talking about a doubling of prices from here.

Turning to oil, they’re still loading the ships, but the ships aren’t going anywhere and they’re likely to be redirected, which means there is still a physical shock coming down, just less than initially feared.

Grains have stopped. Metals have stopped. There is nobody in the ports to do it and you cannot get insurance to sail the ships into the region. The hit on grains is about 25% of wheat exports. Grains are probably the most stressed market right now, with the clearest risk to overall production, not just trade. What kind of planting season are we going to get in Ukraine this year? That’s a key question.

Turning to the metals, it’s the same thing there. What you saw on the London Metal Exchange with nickel had nothing to do with the bullish fundamentals story, that had more to do with margin calls and crowded positioning, but is there upside here in the metals? Absolutely. And on precious metals; it’s a perfect storm for gold right now. It’s the one commodity with the most upside, with the strongest and least uncertain story.

The bottom line is that in the near-term, there will be lots of uncertainty around oil. I think metals, grains and gold have less uncertainty around their upside, especially from these levels. That’s also barring this turns into a recession.

Stepping back a little and looking further ahead, what does this mean for the long-term shape of the global commodities market? 

What we have seen in the last few weeks is a reversion to the political economy of the cold war, with financial dislocation between Russia and the West, culminating in the closed capital accounts in places like Russia. What’s happening in the West at the moment is that they have unwound energy liberalization and begun the process of reregulation, floating price caps and consumer energy subsidies. All of this has contributed to deglobalization and a physical decoupling between the East and West.

Finally, when thinking about the consequence of these policies, there are several things to remain aware of. Firstly, commodities are not homogeneous. They’re not completely fungible. I think there is a belief we can easily distribute this stuff all around the world. But you’re lengthening supply chains in an environment in which inventories are already low. Secondly, I think the other important point about this decoupling or deglobalization is that we are creating a bifurcated commodity market with growing risks of a dislocation between western and eastern commodity prices. Crucially, I would be watching that East-West bifurcation between oil prices and metal prices slowing down. The bottom line to all of this is that we view all this political shock as reinforcing the commodities supercycle.


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