Perspective: Morning Commentary for June 12

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

June 13 – Volatility returned to Wall Street overnight as Israel carried out a massive strategic strike on Iran that is expected to continue in the days ahead. The VIX soared to a three-week high near 22, although it is now settling back below 20, while the dollar index trades near 98.4 as it recovers from its drop to new three-year lows. Yields on 10-year Treasuries are trading near 4.36% this morning, while yields on 2-year Treasuries are trading near 3.92%. Crude oil prices surged to $77.62 per barrel overnight as the attacks occurred, up 14% on the session, although they have cooled a bit now to trade near $74 per barrel. The grain and oilseed sector was mixed, with soybean and wheat prices firming overnight, while corn prices posted modest losses.

President Trump urged Iran to accept a nuclear deal this morning after Israel carried out a large-scale attack on Iran overnight that targeted its nuclear sites as well as top military commanders and nuclear scientists. Israel also reportedly destroyed dozens of radars and surface-to-air missile launchers in the attack. Iran confirmed that several top commanders and six nuclear scientists had been killed in the attacks, including its armed forces chief of staff, Major General Mohammad Bagheri and Revolutionary Guards chief Hossein Salami. Wire service reports suggest that at least 20 senior commanders in Iran are dead following the attacks, including the head of the Revolutionary Guards aerospace force. Roughly 200 Israeli fighter jets hit more than 100 targets in Iran. Israel reportedly conducted the strike upon finding intelligence that Iran could be within days of producing up to 9 – some say 12 – nuclear weapons. Iran retaliated by sending a wave of drones toward Israel, but Israel had already lifted its stay-in-place warning this morning, saying that the Iranian drones had been eliminated by its defense shield.

The world now waits for the next response – either by Iran or by one of its proxy groups in the Middle East or abroad, and Israel isn’t done either. Crude oil prices surged 14% overnight on the fear that this could become a broader regional battle that takes out crude oil production and / or export capacity in the region. The primary focus is on the Strait of Hormuz between Oman and Iran through which a fifth of the world’s total oil consumption passes. Iran has also previously threatened oil infrastructure in other neighboring countries if they yielded airspace to Israel for an attack. Another key to watch would be if Israel were to hit Kharg Island that handles 90% of Iran’s crude oil exports, but thus far Israel remains focused on nuclear and military targets, and not oil infrastructure. But let’s keep in mind that President Trump’s sanctions on Iran had already reduced the oil flow out of Iran. As such, this initial attack has thus far likely done little to change global crude oil balance sheets. Rather, the market is putting in a risk premium for what retaliatory strikes by Iran and its proxies might do in the region, and how it might spread the war to other countries in a way that impacts the production and export of crude oil – most notably in Saudi Arabia. Another twist in this conflict is that Iran has become a major weapons supplier – particularly drones – to Russia in its war on Ukraine, and that too may be curtailed by this strike.

Global fertilizer supplies may also be impacted. Iran is the #3 exporter of urea fertilizer in the world at 4.8 million metric tonnes per year, and the #7 exporter of anhydrous ammonia. Many other major nitrogen producers lie in the region as well, some of which transport their fertilizer through the above-mentioned Strait of Hormuz. Qatar is the #2 urea producer at 5.2 mmt, followed by Saudi Arabia at #6 at 4.2 mmt, and Oman #7 at 3.9 mmt. We probably won’t see the market worry about fertilizer as much as crude oil, but it is an important component of this conflict. Israel is also a major exporter of potash fertilizer, coming in at #5 in the world. This comes on the heels of a recent Ukrainian attack on one of Russia’s largest nitrogen fertilizer production facilities.

“Risk off” is the general theme of the markets not directly impacted by the war this morning. The trade war continues, with the Trump Administration indicating that it expects a string of trade agreements to emerge over the next couple of weeks. President Trump needs that momentum, although he may not get it before we get into early July. The current calendar for both Trump and Chinese President Xi Jinping suggests that the two may not have a face-to-face meeting before the APEC summit in South Korea in November, since sources in China suggest that Xi will yield to Premier Li Qiang to give China’s address before the United Nations General Assembly in September. That suggests that the odds are low that we’ll have a major agreement to support U.S. soybean exports this fall.

The U.S. Environmental Protection Agency is expected to release its Renewable Volumetric Obligations for the biofuels as early as morning that could reshape domestic demand for corn and soybeans / soyoil in the years ahead – either positively or negatively. The market’s bias is that it will be strongly positive for soybeans / soyoil demand, although I would suggest that our bias is that it will be solidly positive, as I’ve previously outlined.

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Perspective: Morning Commentary for June 12

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