More commodities volatility expected as Russia troubles persist: analysts

THE ongoing turmoil in Russia could bring about more volatility in the commodities space – particularly in crude oil, natural gas and grains – as the country’s stability hangs in the balance, analysts polled by The Business Times warned. 

A crisis was briefly avoided on Sunday (Jun 25), as an aborted mutiny in Russia by the Wagner mercenary group gave investors a brief reprieve, but the commodity giant’s geopolitical problems and mounting tensions could once again cause a stir in commodity prices. 

Vishnu Varathan, Mizuho Bank’s head of economics and strategy for Asia, said geopolitical risks tend to have a “significant impact” on commodity prices due to adverse supply shocks. 

For Russia, commodities in the energy sector – namely crude oil and natural gas – could be “at the greatest risk of upside volatility”, he said. 

In February 2022, Russia’s invasion of Ukraine caused a spike in benchmark crude oil and natural gas prices amid concerns about shortfalls in global supplies from Russia. 

In the agri commodities sector, grains such as wheat, sunflower and corn surged amid supply threats, as Russia and Ukraine are major producers of these commodities. 

Varathan said if Russia chooses to double down on its Ukraine attacks, food supply could be adversely impacted, with wheat possibly taking the biggest hit. 

“Upside risks to commodity prices from disrupted supply due to threats hampering production or (an) unhindered commodity passage remain a real and present danger,” he said. 

Sabrin Chowdhury, head of commodities at Fitch Solutions unit BMI, said the main commodity that could be affected in case of a re-escalation of political risks in Russia is wheat. However, she said this would require “substantial damage to farmland or shipping routes” which looks “highly unlikely in the present scenario”.

“Russia is set to have a bumper wheat harvest, and risks to wheat supply from Russia could impact global food security and prices. However, while political risks in Russia will remain elevated in the months ahead, we expect limited impact on Russia’s commodity production and exports, and hold on to our forecasts for wheat production and global wheat prices,” she added.

Rabobank analyst Oscar Tjakra said markets were “lucky” that the crisis in Russia did not escalate over the weekend. This, he said, has allowed wheat, corn and soybean prices to pare some gains. 

“At this point, it seems like the crisis is not going to affect prices (of these commodities) as much as we expected, but we need to pay close attention to what’s going on in Russia,” he said. 

Tjakra said traders and investors should also pay attention to the drier weather conditions that have caused harvests to shrink in producing areas like Europe, China, Australia and the US. 

Poor weather conditions, he said, could impact the prices of these agri commodities more than the troubles in Russia. 

Market watchers said the crude oil sector, meanwhile, is a bit more buffered for now. 

Mukesh Sahdev, senior vice-president and head of downstream at Rystad Energy, said that over the past 35 years, geopolitical events in big oil producers have increased oil prices by an average of 8 per cent over the five days after the start of the triggering event. 

“Given that the short-lived event this weekend in Russia appears to have ended, we do not expect to see such a significant increase in oil prices,” he said. 

He expects oil prices to stay near the US$85 per barrel for the rest of the year. This is despite Russia accounting for 10 per cent to 11 per cent of global crude oil supply, and 5 per cent to 6 per cent of oil refining – which he said are “sizeable” shares that can “impact crude and product markets”.

“So far, the impact on oil markets is shielded by price cap options and Russian oil flows continuing to bypass sanctions. It is hard to speculate on how the situation in Russia-Ukraine can evolve. The level of uncertainty will continue to keep oil markets on the toes,” added Sahdev. 

BMI’s Chowdhury said she is not expecting any commodity to rally to the highs of 2022 this year, barring a “severe escalation in the Ukraine war disrupting all commodity shipments out of Russia and Ukraine”.