Perspective: Morning Commentary for March 1

By: Arlan Suderman, Chief Commodities Economist

Tue, 01 Mar 2022, 14:32

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

March 1 – War rages on, and the money flow continues to rotate out of the equities into the commodity sector. The VIX is trading near 31 this morning, reflecting the elevated level of anxiety on Wall Street, with money continuing to flow into both the safe-haven assets, as well as into the commodities most negatively impacted by the Russian invasion of Ukraine. The dollar is trading near 97.1, while yields on 10-year Treasuries are trading near 1.78%, after trading down to a five-week low of 1.71% earlier in the session. Crude oil prices are trading above $101 per barrel, while the grain and oilseed sector is again sharply higher this morning.

The post cold war peace was shattered last week, with Russia seemingly stepping up the flow of troops and barrage of missile strikes each day since. Ukrainian President Zelensky remains in control in the capital city of Kyiv, but satellite pictures show a 40-mile convoy of Russian tanks, artillery and fuel trucks headed toward the city from the north. Zelensky applied for membership into the European Union, pleading with its parliament to prove that it sided with Ukraine by helping in its defense. Refugees are fleeing Ukraine into Europe, while swarms of volunteer fighters head east to support Ukraine in its fight to defend itself against Russia.

Russia remains undeterred to this point, continuing with the offensive. Russia claims that it is not harming civilians, but an increase in missile launches into highly populated urban centers suggests otherwise. So-called peace talks broke down on Monday, with the two sides far apart. Russia demands that Ukraine surrender, while Ukraine demands that Russia immediately halt its offensive and return home. The latest round of sanctions hit the Russian economy hard, with its currency plummeting in value and many western companies withdrawing from doing business with Russia. The hardest hitting sanctions against Russia were implemented on its central bank, preventing President Putin from accessing its $630 billion in foreign reserves that he had built up as a war chest. The ruble has lost roughly a third of its value as Russia becomes increasingly isolated, with its only real friend in the world currently being China, which is quietly doing what it can to shift business that Russia did with the Swift banking system to its own Chinese currency-based system.

Canada took steps yesterday to ban the import of Russian oil due to the conflict, although the United States and Europe have not yet gone to that extent to show their opposition to the Russian invasion. As such, money continues to flow into Russia to finance the war via crude oil and natural gas sales. However, oil companies Shell and Norway’s Equinor have both said that they will leave their positions within Russia. Many leading banks, airlines and manufacturers have indicated that they will end partnerships with Russia, as it increasingly becomes isolated from the rest of the world.

Crude oil prices continue to surge as supply risks escalate. Prices were already trending higher prior to last week’s invasion due to surging global demand amid sluggish increases in output. OPEC+ was struggling to increase output again following the pandemic, and shale oil producers in the States were reluctant to invest in renewed output due to the Biden Administrations increased regulatory limits on the industry. The Russian invasion occurred on top of those tightening supply risks. The market doesn’t know whether output will decline due to the West finally refusing to buy crude oil from Russia, or whether it will be due to Russia trying to punish the West by shutting it down. Either way, the market senses a high risk that the number three producer of crude oil will be shut out of the world market, with the exception of what it sales to China. The same is true for natural gas flowing out of Russia.

A third of the world’s exportable wheat is now unavailable due to Black Sea traffic being shut down, along with more than 16% of the world’s corn exports, and a significant portion of the fertilizer needed to produce the 2022 crops in the Northern Hemisphere. But the focus is now increasingly on the edible oils market. Ukraine accounted for roughly half of the world’s sunflower oil exports, while Russia added another quarter. Edible oils, to some extent, are interchangeable, raising demand for palm oil, canola oil, soyoil, etc. to fill the gap. The problem is that global supplies of edible oils are already tight, which has driven palm oil prices to new record highs this week, with the same true for canola oil and soybean oil. Adding to the problem, some private Brazil soybean production estimates are falling below 120 million metric tons, suggesting even tighter vegetable oil supplies ahead. That said, I would argue that the markets are still trading emotions right now, with fundamental trade still in the future.

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