To The Moon

Russia-Ukraine War entered the second year. Most of the commodities skyrocketed after the invasion had returned to or below the pre-war level.

Energy is the market focus but the price dropped below the pre-war level and might not have enough geopolitical moment to rebound unless the war fully escalates and spreads to other countries. The weakness of wheat price might reverse if Russia refuse to renew the export deal.

Energy products are the main focus in this war since Russia is the world’s key energy exporter. NYMEX WTI crude oil $Light Crude Oil - main 2301(CLmain)$ price started from USD92.10 as of the close of 23 Feb 2022, and reached an intraday high of USD130.5 per barrel in March. NYMEX Natural gas $Natural Gas - main 2304(NGmain)$ is even more volatile, jumped from USD4.623 per MMBtu to reach over USD10 in August.

However, despite the sanction and price cap imposed by western countries, the energy exports from Russia maintained at high level, and European winter weather is relatively mild together with the effort to secure supply from non-Russia energy sources, the supply and demand situation is much less bad than many had feared, and the energy price retreated significantly and dropped below pre-war level. As of 24 Feb 2023, NYMEX Natural gas$Natural Gas - main 2304(NGmain)$ closed at USD2.548, while NYMEX WTI crude oil $Light Crude Oil - main 2304(CLmain)$ closed at USD76.32.

Assuming the war are restricted in Ukraine and haven’t spread to other European countries, the war will no longer have a material impact on energy price. Western countries don’t want to shut down Russia’s energy supply completely, they just don’t want Russia to make a lot of money from energy exports to finance the war. The ideal situation is Russia selling cheap oil and gas to global market. In fact, Russia is still exporting a lot of their energy products to China and India, and the reduced demand from them in the global market pressured the price.

I can’t predict the outcome of a war, but a win by Ukraine might further pressure the energy price since Russia might probably need to aggressively sell their energy for war compensation and rebuilding the country. Even the war maintains the status quo for an extended period of time, it will not stimulus the energy price like last year since many countries had already reduced the reliance on Russia’s energy.

NYMEX WTI Crude Oil

What I worry more is grain price. Russia and Ukraine together are supplying one third of global wheat. Many of the Ukrainian grain planted in the Southern and Central part of the country, that had been seriously affected by war. Ukrainian grain exports dropped nearly 30% in the last marketing year. Not only the plantation area will be affected, all the input including labour, fertilizer and chemical supply are also affected, not to mention the harvest and the logistic to export the grain.

Grain export deal with Russia is expiring on 19 March, whether Russia will renew it could be a catalyst for market movement, and the lower price of Ukrainian grain because of this uncertainty might also reduce farmer’s willingness to plant wheat.

Russian grain production hasn’t been affected yet; in fact, the harvest of wheat is pretty good. When energy crisis didn’t realize, whether Russia will weaponize grain will need further monitor. At this moment, grain export is not targeted by western countries, so Russia might try to export as many grains as possible to improve their financial situation, but if the war situation turned sour, I can’t rule out the possibility of some form of export ban which might make the inflation situation in western countries more complicated.

CBOT wheat price $Wheat - main 2303(ZWmain)$ started from USX 884.75 as of the close of Feb 23, and reached an intraday high of USX 1363.5 per bushel in March. As of 24 Feb 2023, it closed at USX 721.75. Of course, the weakness could also be explained by bumper crop from Australia and an expected high US production in the coming year.

Technically USX 712.5 is an important support, and RSI is approaching oversold level. We might consider a long position @ 715, stop loss @ 680, target @ 800.

CBOT Wheat

Disclaimers

Above information are for illustration only and there is no guarantee on the accuracy of the information. They should not be treated as investment recommendations or advices.