Tuesday , 3 October 2023

Soaring Commodity Prices Caused By Russian-Ukraine War Could Lead To Recession

Commodities everywhere have soared in price – oil, gas, base metals, precious metals, and grains and as well fertilizers – and these high costs, along with higher costs for just about everything else, are squeezing disposable incomes and that in turn could lead to a recession.


The most extreme impact of the disruption was seen with nickel prices that leaped by roughly 250% in two days, trading briefly above $100,000/tonne causing shorts to scramble to cover their positions and margin calls. Trading in nickel has been suspended…[but] how long will this last? Nickel is a key commodity used in stainless steel and electric-vehicle batteries and Russia supplies roughly 7% of the global nickel supply and 17% of high purity nickel production. These are not insignificant amounts in a world already suffering shortages of nickel….Nickel inventories at both the London Metals Exchange (LME) and the Shanghai Exchange were already at their lowest levels in years because of surging demand…

image-20220314104946-1Source: www.reuters.com, www.mining.com

Precious Metals

China and Russia…produce roughly 21% of the world’s gold but sanctions are going to bite into Russia’s supply to global gold stock. Russia, being a key producer as well as holding large reserves, leaves a huge hole for global supplies. Could what happened in the nickel market happen in the gold market? A huge short squeeze?

The same holds for silver, platinum, and palladium, especially the latter where Russia has 40% of the world’s production and they hold the world’s largest reserves of palladium. There is concern that, like what happened to nickel, there could be a squeeze on delivery commitments, raising the risk of defaults. There is also concern that Russia, along with China, could use the “nuclear option” on the petrodollar (U.S. dollar). Russia could demand payment for its oil in gold instead of U.S. dollars. Given sanctions against Russian banks and their use of SWIFT for international payments, payment in gold would be a way of getting around those sanctions. That in turn could spark sanctions on gold against Russia and that in turn could lead to a huge short squeeze in the gold derivatives market and a price hike not unlike what we saw with nickel.


Possibly one of the worst effects of sanctions on Russia is the potential disruption of global grain supplies. Russia is a major exporter of wheat and other grains and with Ukraine the two alone have upwards of 30% of global trade in wheat, 17% of maize, and upwards of 78% of sunflower seed oil. Russia is also a major fertilizer producer. All of this is coming at a time when global agriculture and food supplies are already fragile. In 2021 droughts were not uncommon as both the U.S. (fifth in global wheat production) and Canada (ninth in global wheat production) both suffered from reduced yields due to drought. Russia prohibiting the export of nitrogen fertilizer adds to the woes. Constraints on shipping are already negatively impacting getting products to markets. With the Black Sea all but off limits for anyone, all trade is locked inside Ukraine and Russia.

A prime destination of Russian and Ukrainian agricultural products is the Middle East and Africa. Both Turkey and Egypt are large importers of Russian/Ukrainian wheat and corn. In 2011 food shortages helped spark what became known as the Arab Spring. Grain prices rose on average 40% in 2021 and are now expected to rise almost that much again in 2022.

Since March 2020, wheat is up 105%, corn up 107%, sugar up 35%, and soybeans up 88%. All this feeds right back into the food you buy at the grocery store.

Soaring Agriculture Prices

image-20220314104946-2Source: www.stockcharts.com

Crude Oil, Natural Gas, Gasoline, Heating Oil

Crude Oil:…As long as the conflict in the Ukraine continues, oil prices are most likely destined to remain above $100 and could probably go even higher. Oil at $150 or higher is no longer inconceivable.

Natural Gas: Prices that soared almost five-fold in the EU last year could rise another 50% or more.

Gasoline: The chart below on gasoline prices in Canada is actually a month behind, going only to February 2022. In February they averaged US$1.27/liter and are now roughly US$1.50/liter.

image-20220314104946-3Source: www.stockcharts.com

Recession Possibilities

… A recession does not necessarily follow oil price spikes immediately but high costs for gasoline and heating oil along with higher costs for just about everything are squeezing disposable incomes and that in turn…could lead to a recession.

Below we show our final chart of the WTI oil for the past 75 years. Note how each oil price spike (S) was a followed by recession (R). This time is not different.

Source: www.macrotrends.net
The above excerpt from the original article by David Chapman was edited [ ] and severely abridged from 8250 words to just 800 (…) to provide you with a faster and easier read. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.


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