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Perspective: Morning Commentary for July 9

By: Arlan Suderman, Chief Commodities Economist

July 9 – Stock futures were mixed overnight, following a volatile day on Wednesday as fighting intensifies again in the Middle East. Yet, the VIX is trading back below 17 this morning, while the dollar index trades near 101.0. Yields on 10-year Treasuries are trading near 4.56%, while yields on 2-year Treasuries are trading near 4.18%, after spiking to fresh 16-month highs on Wednesday. WTI crude oil is trading near $73 per barrel this morning, while Brent trades near $78 per barrel. The grain and oilseed complex was mostly weaker as Midwest weather forecasts again shift milder and wetter for the key corn pollination period later this month.

The U.S. military again hit Iran overnight, hitting targets in several areas of the country focused on military assets, including air defense systems, coastal surveillance assets, missile and drone storage sites, naval capabilities, and coastal military logistics infrastructure. Iran says that the U.S. strikes killed 14, while injuring 78. Iran retaliated by targeting U.S. military assets in Kuwait, Qatar, and Bahrain. Those strikes were largely defended by air defense systems. The only damage report that I found thus far is of one person injured by falling shrapnel from an intercepted projectile. It was the second night for U.S. strikes on Iran following Iran’s targeting of three oil and LNG carriers in the Strait of Hormuz that were attempting to leave the Persian Gulf via the U.S. prescribed route through the Strait of Hormuz near the Oman coastline. U.S. military sources indicate that Iran has been actively mining the Strait in a way that tries to force ships to use its prescribed route near its coastline so that it can control who passes through the Strait, with a goal of charging tolls for doing so. U.S. military sources indicate that they do not expect the current strikes to escalate into a full-fledged war again, with Iran’s military capability somewhat limited at this point. Rather, it is believed that each one of these strikes bring us closer to assuring safe passage for ships through the Strait of Hormuz. The United States gains more intelligence on Iran each time it strikes a ship, allowing it to then neutralize more of Iran’s capabilities. President Trump sounds increasingly doubtful that a deal with Iran would ever work – that it could be trusted to keep its end of the deal. As such, that swings the pendulum more toward seeking a military end to the conflict rather than a negotiated end.

Insurance rates for ships in the region are rising as the conflict intensifies once again. Some underwriters are advising ships to pause their trips through the Strait of Hormuz, while others are re-evaluating risks. War risk insurance is typically something that is purchased for a seven-day period, while being reviewed every day or two. Insurance rates are based on the value of a ship. Some sources indicate that rates jumped to 3% of the value of the ship following Iran’s attack on three ships in a 24-hour period earlier this week, up from 2% previously. Most ships are reluctant to travel through the Strait without coverage. Some news reports indicate that most ships can still get coverage if they want, but it may cost them up to 5% of the value of the ship, dramatically increasing the cost of the cargo that they are hauling. The shipper must then decide whether they are willing to risk the ship and crew, even if they have coverage. Many choose not to take that risk.

Russia formally implemented a ban on diesel fuel exports on Wednesday. The ban is currently in place through July 31, although it could very well be extended beyond that point. This comes as Russia increases imports of gasoline to increase domestic supplies to alleviate shortages. Consumer frustration with the Ukraine war are increasing as many people have to wait in line for hours to fill up with gas. The fuel shortages are a product of increasingly effective strikes on Russian refineries by Ukraine – with many of those strikes more than 1,500 miles inside the country. Ukraine indicates that its goal is to reduce fuel supplies available to Russia’s military on the frontlines of the war. Russia typically exports twice as much diesel as it uses domestically. The export ban removes the world’s second largest exporter from the global market at a time when global inventories are already quite low due to the war with Iran. Russia now becomes an importer, competing with Europe for available supplies. That puts upward pressure on U.S. prices as the world market draws inventories away from the domestic market. Russia exported 842K barrels per day of diesel and gasoil in July 2021 prior to its war on Ukraine.

The Midwest corn crop will largely go through its critical pollination period over the next several weeks. The greatest potential threat to the crop would be extreme heat during pollination. The normally trusted European model has been calling for intense heat and dryness for much of the period, while other models have been called for various degrees of showers and more moderate temperatures. Which will win out? We’ve seen a notable shift in the model consensus over the past 24 hours toward the wetter and more moderate solutions. That’s increasing selling pressure in the grain and oilseed complex as fund managers pencil in higher yields, versus the risk of lower yields feared previously. That’s increasing producer selling pressure as well – on both sides of the equator.     

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