The Russian invasion of Ukraine has the potential to establish a new commodity world order that tilts reliable supply toward North America, Bloomberg Intelligence said in a research note.
Analyst Mike McGlone argues that should oil and gas prices continue to spike amid the increased geopolitical tension, it could very well be the catalyst for a global recession. “The conflict is unique, but in 2008, the severe risk-asset reversion was aggravated by a sharp rally in West Texas Intermediate crude oil to its peak around US$145 a barrel,” said McGlone.
The analyst believes the crude oil market will likely mirror past reversion patterns from elevated prices. Brent crude has dropped about 80% on three occasions since the 2008 peak. “It’s possible that Russia’s invasion of Ukraine triggers a global recession and accelerates electrification and decarbonization trends,” said McGlone.
According to Bloomberg, should prices sustain near end-of-February levels, it should be a boon for energy and agriculture producers. Crude oil and most grain prices are currently trending well above US production costs.
While a new world order is likely to shift liquid fuel flows (Russia to China) rather than cut supply, Bloomberg is more confident that North American producers are gaining “plenty of impetus.” According to McGlone, commodities have proved their value as a portfolio hedge in 2022. However, they risk a similar ebbing-tide outcome as in 2008. In his view, precious metals are gaining the upper hand in 2022.
“To outpace gold’s tendency to appreciate in terms of fiat currencies with unlimited supply, copper needs outsized demand from China, which we see as mostly past tense,” said McGlone. “The metals sector is well poised for enduring outperformance versus most commodities as spiking energy will incentivize supply and accelerate decarbonization trends.”
Meanwhile, market analysts at Wood Mackenzie are tracking spiking coal prices. Buyers in markets including Europe, Japan, South Korea, and China are scrambling to address their exposure to Russian supply.