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Sunday, August 14, 2022

JPMorgan : Oil, Gas, Wheat to Spike on Russia – Ukraine Crisis

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JPMorgan’s commodity desk in a must-read note published earlier today by the bank’s commodity strategist team led by Natasha Kaneva, writes that “geopolitical escalation over the last few days has materially increased the risk of further aggravating commodity market imbalances. At this stage of the conflict, it is hard to see a path towards an easy de-escalation.”

Consequently, JPM now expects “a steady rise of tensions in Ukraine and a corresponding intensification of sanctions from the West.”

In that case, the bank warns that “the world could see an extended period of elevated geopolitical tensions and high risk premium in all commodities given Russia’s far reaching impact on global commodities markets.

First, JPMorgan looks at what the impact on oil could be and it’s not pretty.

Kaneva notes that Russia has always been a reliable supplier of oil, even at the height of the Cold War, she warns that if the market begins to price a probability that things have changed and Russia may take retaliatory measures by reducing its energy exports, a four-month disruption of 2.9 mbd of Russian export volumes to Europe and the US, will likely see the Brent oil price averaging $115/bbl in 2Q22, $105/bbl in 3Q22 and $95/bbl by 4Q22.
JPM notes that even as bilateral relations have soured, Russian diplomats have continued  working with European and US counterparts to revive the Iran nuclear agreement, signaling a deal may soon be reached.
As such, a return of Iranian volumes could bring about 180 mn bbls of oil to the market, offsetting some of the estimated Russian supply shock. Assuming Russian escalation is coupled with an Iranian deal, JPM sees the Brent oil price averaging $110/bbl in 2Q22, $100/bbl in 3Q22 and $90/bbl in 4Q22, which is also the bank’s new base case view.

Things get scarier when looking at European gas prices, where JPM now revises its summer 2022 TTF price forecast to 77.50 EUR/MWh “to reflect the evolving geopolitical risks of the Russia/Ukraine conflict.” While current fundamentals suggest softness for TTF price in the offing (as per JPM’s previously published price forecast), the bank notes that it can “no longer avoid the risk premium of a supply disruption that could manifest with this geopolitical crisis.”

And with both Germany and now Joe Biden removing the prospect of Nord Stream 2 commencing in 2022, an in-service date for the pipeline in 2023 could create a reprieve for TTF price; however, based on statements made by the European Union and the US, the probability that Nord Stream 2 does NOT commence in 2023 is increasing, and as JPM calculates, “if Nord Stream 2 does NOT commence in 2023, we would expect the European natural gas market to find itself in a perpetual competition for LNG, ultimately manifesting in higher prices for longer.”

Stepping away from oil and gas, JPM next looks at base metals where inventories are already running extremely low.

With Chinese demand already looking set for a strong post-CNY rebound, boosted Russian risk premium adds further bullish fuel to industrial metals complex in the coming quarters.”

As such, JPMorgan boosts its 2Q22 forecasts to $3,550/t for aluminum, $26,500/t for nickel, $10,650/t for copper and $3,650/t for zinc.

Gold is also not immune to the upcoming commodity shortage, and safe-haven buying on the back of the escalating Russia-Ukraine conflict has further driven gold’s ytd decoupling with real-yields with gold now trading around $250/oz rich vs the current level of US 10yr real yields.

According to JPM, the elevated Russian risk premium in the coming quarters likely means this premium will be sustained much longer than the bank previously envisioned, blunting golds fall amidst higher rates, and as such JPM now boosts uts full year 2022 gold price average by 11% to $1,808/oz.

An even bigger price shock hides in palladium, where according to JPM, the risk to a disruption in Russian PGM supply is immense, with the country accounting for ~12% of global platinum mine supply and ~40% of global palladium supply. As such, JPM now sees palladium continuing to gain sharply over the coming months and averaging around $2,650/oz in 2Q22 while platinum gains to average $1,150/oz next quarter.

JPM next warns that the unfolding conflict between Russia and Ukraine remains the primary driver and upside risk factor for agri markets.

“The outlook for increased Brent crude oil prices over the quarters ahead is a materially supportive factor for the sector, raising the opportunity costs for biofuels and increasing production costs further, at a time of critical inventory tightness. Our agri price forecasts have been revised higher across much of the agri complex.:

Translation: your food is about to get much more expensive.

Of course, the timing of any potential disruption in grain exports from Russia or Ukraine will dictate the extent of risk premium across exposed agricultural markets, especially CBOT Wheat and CBOT Corn.

In the event of export disruptions to Russian wheat-outside of the existing old crop quota, JPM sees CBOT Wheat tracking to the bank’s high case price scenario of 950 – 1,100 USc/bu.

Not surprisingly, wheat is soaring and has just hit the highest level since 2012. Expect it to reach fresh all time highs in the days ahead.

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