the story So Far: Commodity prices rise after Russian army invades Ukraine Last month. Bloomberg Commodity Index Last week recorded its biggest weekly rally since 1960, up 13%. Many fear that a fall in the supply of essential commodities such as oil, metals and agricultural commodities could negatively impact the global economy which is still recovering from the pandemic. On Thursday, the price of Brent crude oil touched nearly $120 a barrel, the highest in a decade.
Why are commodity prices rising?
The military conflict between Russia and Ukraine has caused disruption in the global commodity supply chain. Commodity traders are unwilling to buy oil and other commodities from Russia, fearing they may be unable to sell them on global markets due to sanctions imposed by Western governments. The United States and the European Union are taking measures to undermine Russia’s economy by cutting Russian banks off the SWIFT payment messaging system and freezing Russia’s foreign reserves.
There are also logistical difficulties in transporting goods to and from war zones. Exports from this region have already been affected and are likely to be further affected, and this risk is priced by traders. It should be noted that in 2020 Russia produced about 12% of the world’s oil and about 16% of the world’s natural gas. It produced about half of the world’s palladium (the shiny white metal that is a key component in catalytic converters – a part of a car’s exhaust system that controls emissions, for example). On the other hand, Ukraine supplies about 12% of global wheat exports and 13% of global corn exports. In fact, the country supplied almost 90% of China’s corn imports in 2019. Disruptions in the supply of such critical commodities could affect global commodity prices.
At the same time, suppliers in other parts of the world have failed to increase their production to make up for the loss of production in Russia and Ukraine. For example, the Organization of the Petroleum Exporting Countries (OPEC) has made no effort to increase its production despite repeated calls by various world leaders to ensure energy security. In fact, the OPEC meeting last week was over in minutes.
Is Commodity Inflation Just About the Russo-Ukraine War?
No. Commodity prices have risen significantly since at least 2021, when lockdowns were gradually lifted by governments and economies were allowed to open up. It should be noted that, due to various frictions in the global economy, the supply chains disrupted by the lockdown took some time to return to normalcy. The supply of goods was limited and this shortage was reflected in the form of high prices. Some analysts have also blamed policies in many countries to replace fossil fuels with renewable energy as a possible reason behind the rise in commodity prices. They argue that the emphasis on renewable energy has discouraged investors from investing in the production of conventional fossil fuels. Meanwhile, the pandemic has seen major global central banks such as the US Federal Reserve and the European Central Bank inject huge amounts of fresh money into their economies. This led to an increase in the demand for all goods and services and a rise in their prices. In short, commodity prices have risen sharply due to too much money printed by central banks chasing too few commodities.
Global commodity prices have risen by more than 60% since early 2021, as measured by the Bloomberg Commodity Index. Meanwhile, the price of an essential commodity like oil has risen even more.
what lies ahead?
The process of the Russo-Ukraine war, which is unpredictable at the moment, will naturally affect the price of commodities going forward. Impact on commodity supply The longer the war lasts and the worse it will get. It should be noted that cutting off Russia’s economy from the rest of the world could affect not only Russia, but also the businesses and consumers that depend on the Russian economy. For example, countries like Germany are heavily dependent on energy supplies coming from Russia. That is why the West has not yet banned Russia’s exports of crude oil and natural gas. It is not only Russia that will suffer from war and sanctions but also the rest of the world. At the same time, as the global economy struggles to grow while prices continue to rise, analysts warn of the risk of a stagflation recession, marked by high price inflation and low growth.