Commodity markets still in flux one year into the war

It has been a tumultuous year since the outbreak of war in Ukraine. Energy markets are still in a state of flux, though they have calmed significantly. (The prices of European gas and Brent crude have fallen ~85% and ~35% from their respective peaks.) And grains prices are still historically high as the deadline for another extension of the Black Sea Grain Initiative approaches.

This week, Russian officials followed up on their recent announcement of a 0.5m bpd cut to oil production in March with a larger cut of up to 25% to oil exports. We think these cuts reflect the impact of the EU’s ban on imports of Russia’s petroleum products, which unlike crude, will be much more difficult to redirect to other markets, not least because China and India are also large net exporters of oil products. In our view, these announced cuts are just the first cracks to appear in Russia’s overall production capacity. Indeed, we think crude oil output could fall by an additional 0.2-0.4m bpd over the course of this year.

While investors’ attention has centred on the health of advanced economies in recent weeks, the focus may shift back to China next week with the release of February PMI readings. We expect the data to confirm that domestic demand is rebounding. But, we suspect that much of the reopening bounce is already priced in, so the data alone might not be enough to give a lift to commodity prices, especially if it also reveals weakness in external demand.