Growing inflation risks add pressure on Central Banks

Posted on February 9, 2022February 13, 2022 by Vrasidas Neofytou

Inflation has been at the center stage in modern macroeconomic history since it measures the progressive increase in prices of goods and services in an economy.

Global inflation has accelerated in recent months following the reopening of economic activities after the pandemic, the improvement in labor market, the successful vaccination campaigns, the supply chain disruptions, and the higher crude oil and electricity prices.

In the United States, the Consumer Price Index jumped to 7,2% in December, its highest since 1982, in the United Kingdom inflation hit a 30-year high of 5,4%, while in Eurozone it surged to a new record high of 5,1%.

Growing inflation risks have added pressure on policymakers, with the Bank of England already raising interest rates twice to 0,50%, while European Central Bank has turned hawkish, with expectations for a rate hike at the end of the year.

Friday’s unexpectedly strong nonfarm payrolls report for January has increased the chances that the Federal Reserve could start raising interest rates by March to contain rampant inflation.

Investors are ready for more volatility in the forex market at a time central banks around the world have pledged to tighten their monetary policies by raising rates and concluding their bond-buying programs.

Aluminium jumps to near 13-year high on supply disruptions

Posted on February 8, 2022 by Vrasidas Neofytou

Aluminium price rose 2% to $3,170/Tn on Tuesday morning, posting its highest level since mid-October 2021, on growing concerns over supply shortages in China, falling inventories, geopolitical risk in Ukraine and Guinea, and the robust global demand.

Aluminium futures, Weekly chart

The price of the valuable industrial metal hit a 13-year high of $3,205/Tn in October 2021, amid the supply-demand imbalance, strong physical demand, and reflation bets from institutional investors.

The lightweight metal has seen tremendous demand in recent years mainly from the renewable and automotive industries at a time global supplies declined following pandemic-led production cuts and after a military coup in Guinea sparked global worries about the supply of bauxite, the main ingredient in aluminium.

In addition, Slovak aluminium smelter Slovalco on Monday said it had cut output to about 60% of capacity because of the high cost of power and emissions allowances and a lack of government compensation.

Supply concerns over Ukraine border crisis:

Investors worry about possible supply disruption in case of a military event in the Ukraine borders or introduction of economic sanctions since Russia has been one of the world’s largest exporters of aluminium.

Russia has accumulated over 120,000 troops on the Ukrainian border, with EU and U.S warning that an invasion seems imminent, with Russia denying it.

Western allies have threatened Russia with heavy trade and economic sanctions in case of an invasion of Ukraine, adding a geopolitical price premium on Aluminum prices together with other commodities such as crude oil, natural gas, wheat, coal, and other industrial metals.

Production cuts in China:

Aluminum prices have got additional support from the news coming from China where the local government in the Guangxi region next to the Vietnamese borders have applied social restriction in the aluminium-producing city of Baise with more than 3 million population amid a Covid-19 outbreak.

As a result, local producers have seen transport disruptions of the raw material and products, intensified the already tightened market, and falling inventories in the country which produces more than half the world’s supply.

Inventories in Shanghai Futures Exchange (ShFE) warehouses have fallen nearly 20% to 266,906 tonnes since the start of the year, at a period of a significant reduction in aluminium production in the country to improve air quality due to the Beijing Olympics, lifting the price of the metal as well.

WTI crude oil hits $92/b for the first time since 2014

Posted on February 4, 2022 by Vrasidas Neofytou

WTI and Brent oil prices jump 2% on Friday afternoon, posting fresh multi-year highs of $92/b and $93/b respectively as investors digest the decision of the OPEC+ alliance to stick to its output plan at a time that global supply is tightening, extreme weather threats oil supplies in the U.S., and ongoing geopolitical risks add a price premium on the energy market.

Energy traders have been bullish on the crude oil, lifting WTI and Brent prices by 20% since the beginning of 2022, based on the limited spare capacity among the crude producers, the recovering fuel demand to pre-pandemic levels as economies emerge from the pandemic, and the geopolitical tensions in Ukraine and the Middle East.

Cold storm in the U.S lifts WTI oil prices:

Both oil contracts extended already sharp profits from the previous sessions on Friday following the growing concerns for a possible supply disruption from a massive Arctic storm in the United States.

WTI crude oil contract, Weekly chart

U.S.-based WTI crude climbed to as high as $92/b, its highest level since Oct.2014 as the extreme winter storm is threatening to disrupt crude oil supplies from the oil-rich state of Texas, and especially from the Permian Basin, the heart of Shale oil and gas production in the country.

The cold storm has already cancelled flights and closed schools across central and northeast United States, threatening crude oil supplies and power outages.

Geopolitical tensions support prices:

The ongoing tensions in the oil-rich Middle East and the border crisis between Ukraine and Russia threaten the already undersupplied global energy market, lifting crude oil prices to their highest levels since 2014.

Russia has been the main gas supplier of Europe, providing the 40% of the gas needs per year, while it also supplies a significant amount of crude oil and coal, necessary for the power generation especially these days during the heart of North’s Hemisphere winter.

Furthermore, the recent rocket and drone attacks to the United Arab Emirates from Yemen’s Houthi movement had added another supply-led geopolitical risk premium on oil prices, at a time some members in the OPEC alliance have been facing problems from producing at their quota levels.

Crude oil prices are heading towards $100 key psychological level, despite the gradual increase of oil output by the OPEC+ alliance, which agreed a few days ago to stick to moderate rises of 400,000 barrels per day (bpd) in oil output.

Geopolitical tensions push Brent crude oil closer to $100

Posted on February 3, 2022 by Vrasidas Neofytou

A cocktail of bullish headlines are pushing crude oil prices closer to 100 dollars per barrel, with geopolitics adding an upside risk premium to the energy market.

Escalating geopolitical tensions in Europe and the oil-rich Middle East boost the price of Brent beyond 91 dollars per barrel for the first time since 2014, with the front-month contract of WTI heading towards 90 dollars per barrel.

Tensions between Russia and Ukraine have challenged energy prices. Since Russia has been the world’s third-largest oil producer, just behind the USA and Saudi Arabia, with an annual average production of 11 million barrels per day.

In addition, natural gas and electricity prices have also soared to record highs since Russia has been the second-largest producer of dry natural gas in the world, and the largest gas supplier in Europe with primary clients being Germany, Italy, France, and Austria.

Russia is demanding that Ukraine should never be permitted to become a member of the NATO military alliance, with the US and its European allies warning of severe economic restrictions in the case of invasion.

Threats to the United Arab Emirates from Yemen’s Houthi movement added another geopolitical risk premium to oil prices, at a time where several OPEC members have been facing issues from producing at their quota levels.

Russia-Ukraine tensions weigh on global grain market

Posted on February 2, 2022 by Vrasidas Neofytou

Commodity investors worry for the possible impact of Russia-Ukraine tensions in the global food security system since the two ex-Soviet countries are among the top five key players in the global food and grain market, crucial to feeding populations from Europe, Africa and up to Asia.

A threat of war between the two countries could cause cargo delays, supply disruptions or cuts in supplies which will lead to higher grain and food prices around the world.

Grains have become an essential part of the human diet and health for the last 10,000 years as they are used for several purposes such as generating flour for the bakery industry and for use as feed for livestock, especially for pigs, cows, and poultries.

Top grain exporters:

Both countries are responsible for 30% of global grain exports, with Russia being the world’s largest wheat exporter and Ukraine being the world’s third supplier of grains and vegetables, mostly exporting from their vulnerable-to-war- Black Sea ports.

Russia and Ukraine have been known as Europe’s “breadbaskets” and “vegetable gardens” since they have a lot of agricultural production due to the extensive amount of agricultural land present there, and the ideal terroir and climate.

Ukraine, which has some of the most fertile lands on the planet, grows more than 26 million tonnes of wheat in a year and exports 18 million (mainly on Turkey and Arab countries), with most yields being contributed by the central and south-central regions of the country (exactly those parts most vulnerable to a potential Russian attack) where soil conditions, the temperatures, and the climate are favourable for the growth of wheat.

Market reaction:

The world has seen headlines for the Ukraine-Russia border tensions since the end of October 2021, driving up by as much as 30% the prices of grains such as wheat and corn on concerns for possible disruptions in the supply grain chain in case of military aggression or the introduction of economic sanctions against Russia and its access to trade.

Wheat future contract, Weekly chart

Corn future contract, Weekly chart

“Force majeure” event:

The largest Ukrainian Black Sea ports such as Pivdennyi, Odesa, Mykolaiv, and Chornomorsk on the one side and the larger Russian Black Sea port of Novorossiysk in the Krasnodar region on the other side, could be some of the priority infrastructure targets in case of conflict.

Grain exporters that are using the ports in the Black Sea might declare a “force majeure” event in case of a war, meaning that they will not be able for fulfilling contractual obligations, having the right to terminate the contract or at least to delay the time for the delivery.

Following the declaration of a “force majeure” event, it means that some of the world’s largest grain importers such as China, Egypt, Spain, Turkey, Middle East countries, and the EU will have to search for alternative sources, importing grains from other top exporters such as Australia, U.S, and Argentina.

However, in such a scenario, buying grains from such a long distance will increase the initial import cost in terms of freight due to longer voyage times, rolling the higher costs to the final buyer, and adding further pressure to the food inflation rates.