Commodities suffer through another volatile week amid the Ukraine crisis

Commodity markets closed out a torrid week with some minor gains, as investors continue to weigh up geopolitical risks against disruptions to physical flows amid the Ukraine conflict.

The breakdown of peace talks between Russia and Ukraine saw crude oil prices extend their rebound on Friday. However, it failed to offset the losses earlier in the week, with Brent crude ending down more than 4%. The market continues to fret about supply disruptions, with data suggesting they are already impacting. Loadings from two Baltic ports were revised down to 5.9m tonnes in March after three cargoes were dropped from the program. The industry’s apparent inability to fill any potential gap has seen calls for consumption to be reduced. The International Energy Agency said the world could lessen the oil shortage by restricting people’s use of cars and accelerating the transformation of cities dominated by cars. The IEA warned earlier last week that Russia’s oil supply could slump by a quarter. The market is also keeping an eye on China, where a renewed outbreak of COVID-19 has resulted in some of the heaviest virus-related restrictions since early 2020.

European natural gas was steady on Friday after another volatile week of trading. Russian gas flows via Ukraine rebounded to levels agreed in a transit accord, grid data showed. That helped offset lower volumes via the Nord Stream 1 pipeline. Nevertheless, traders remain on edge over the impact of the Russia-Ukraine conflict. With the heating season coming to an end, the focus moves to the refilling of storage sites which are still near record lows. North Asian LNG prices were also steady, with Japan’s utilities dipping their toes back into the water. Tohoku Electric is said to be in discussions to purchase an LNG cargo for delivery in April. This comes after Jera, Japan’s biggest power producer, is seeking several LNG cargoes for prompt delivery after an earthquake knocked out some coal power plants.

Coal markets were weaker as traders remain on the sidelines following the recent surge to record highs on concerns of supply disruptions. News that China is looking to expand domestic production also weighed on sentiment. Policymakers at the National People’s Congress (NPC) announced that they intend to boost domestic production capacity as well as build a 620 million tonne coal stockpile. Even so, we expect China to remain an importer of coal, as we expect coal-fired power generation to grow just as quickly as coal production to support economic growth. This is likely to dent the emission reduction efforts of China and the world. Global energy-related carbon dioxide emissions rose by 6% in 2021 to 36.3 billion tonnes. China’s CO2 emissions rose above 11.9 billion tonnes, accounting for 33% of the global total.

Base metals ended the week steady on expectations of more China stimulus. However, the Ukraine conflict also continues to cast a shadow over the sector. Aluminium prices inched lower, however fears of disruptions continue to ripple through the industry. Australia imposed an immediate ban on exports of alumina and bauxite to Russia. Australian imports make up 20% of Russia’s total alumina imports. Nickel continues to trade limit down on the LME as traders remain on the sidelines. The market has been essentially frozen following the short squeeze that saw prices hit USD100,000/t.

Iron ore futures gained as the outlook was boosted by China’s promise of more support for the economy. Futures in Singapore pushed to USD154/t after Beijing said it would ease the recent regulatory crackdowns, while supporting the property sector.

Gold struggled to hold recent gains as the spectre of an aggressive rate hike cycle weighed on sentiment. A stronger USD also reduced demand as an alternative asset. Nevertheless, safe have demand remains supportive.

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