COMMODITY PRICES TO DRIVE UP INFLATION?

[04.03.2022] The onset of the Russo Ukrainian war has driven up the price of a number of key commodities. With consumer price inflation already high this is now an important market focus.  Below we look at the extent of some of these moves and whether they are likely to be sustained.

Since the start of the invasion Brent crude has risen around sixteen percent and reflects the fact that Russia produces around ten percent of the world’s oil.  Even though energy supplies are specifically excluded from Western sanctions it seems that shipping companies are reluctant to provide transport and banks are also wary of helping finance the deals. This is due to worries about whether sanctions will be extended into these areas and concern about the public relations aspect of being seen to be trading with Russia. So, it is quite possible that, as the practical impact of sanctions becomes clearer, oil prices will settle at a lower level than now.

There has also been a near doubling in the price of European natural gas as Russia supplies around forty percent of European gas requirements. The big surge in the price of European natural gas reflects some buyers looking for an alternative source of supply due to fears that the supply of Russian gas will be disrupted. However, it should be noted again that gas is excluded from Westerns sanctions on Russia. Furthermore, as Russian central bank reserves have been frozen Russia is in desperate need of hard currency. So, it is unlikely that Russia would unilaterally turn off gas supplies to Western Europe.

Finally, the price of wheat has risen around thirty five percent as the combined Russian and Ukrainian production represents around 25 percent of global exports. Ukrainian exports have now all but ground to a halt as many of the port facilities have been damaged in the war. The duration of the surge in wheat prices will ultimately depend on how long the war continues.

The price of a number of key commodities has surged in the last week. However, commodity markets are volatile especially in times of geo political tension. In the energy markets, as traders become clearer about the extent and practicalities of sanctions, prices may well settle at a lower level. In the wheat market prices will depend on how long the war in the Ukraine continues. So, the pass through from higher commodity prices into consumer price inflation may be more limited than headlines suggest.

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This post was written by Robin