A war in Europe was considered highly unlikely by most experts on Wednesday. It has now been a reality for two days. It is widely spoken of the largest military conflict in Europe since the Second World War. After two years of corona from which the economy is still recovering, Russian President Putin is sending another shock around the world.
Markets do not like uncertainty and if a war - besides a lot of suffering - brings something with it, it is uncertainty. The players on those markets (suppliers, buyers and speculators) have tried as best they can to hedge against the possible effects of the war, which came as a complete surprise to almost everyone.
Interaction
These effects were particularly extreme on the stock exchanges and futures markets on Thursday morning. Investors left stocks en masse and looked for a safer haven for their money. According to many, keeping liquid assets was not the safest option in view of possible sharp exchange rate falls. These were, for example, raw materials and gold. This effect has been further reinforced by the position of both Ukraine and Russia in agricultural raw materials. Both countries are agricultural superpowers, especially in the fields of wheat, corn and sunflower oil. In addition, Russia also has an extensive reserve of minerals. From oil and gas to iron and nickel ore. The resulting uncertainty about the possible loss of supplies from Russia, in combination with money for which a safe haven was sought, had a mutually reinforcing effect. Stock markets fell, while crude oil, wheat and gold, for example, rose.
Rationally speaking, that reaction may have been too extreme. But trade is simply not done purely on facts. Emotion and gut feeling always play a role (unnoticed), even with the most seasoned traders. And once the game is on, there is often no stopping it. According to some experts, this is even reinforced by the calculation models and analyzes that also become somewhat upset by strange price movements. It was realistically expected that extreme prices such as €344 for wheat on the Matif (an all-time high) did not last long. A correction such as the one that has started since yesterday afternoon in almost all markets is logical in a certain sense.
The wheat on the Matif continues to trade above the price at the beginning of this week. Half an hour before the close of the fair, the rate for the old harvest contracts is approximately €290 per tonne and for the new harvest around €270 per tonne. The CBoT shows a similar price movement. Prices are falling, but corn and wheat still remain above the level at the beginning of this week. Brent oil is trading at $97,41 per barrel at the time of writing. That's the same as Wednesday. Gas remains priced relatively high. At €90,40 per MWh, the TTF is approximately €20 higher than at the beginning of this week.
What does the physical market do?
The big question now is: how will the physical market develop? Russia is an important player when it comes to oil, but it may also be possible to get it out of the country without any Western sanctions. China is, so to speak, already ready to purchase the oil, including its own payment system. And India is also not particularly eager to side with the US and the EU. Reuters reports that India is exploring the possibilities of setting up payments in rupees with Russia to soften the shock to its own economy. Russia is essential to India, especially as a fertilizer supplier. The oil that flows out of Russia in these ways most likely uses the oil that would otherwise have come from, for example, the Middle East. There will certainly be disruptions, but there appear to be some alternatives for the supply of oil.
For gas, finding new markets for Russia will become more difficult in the short term. LNG is relatively easy to send around the world, but that is only a small part of total Russian gas exports. Conventional natural gas, that is the bulk. This is transported almost exclusively via pipelines. However, this infrastructure is mainly aimed at Europe. Here too, China could become the new sales market, but that will take time. Building a new pipeline normally takes years. The construction of the approximately 1.200 kilometer long Nord Stream 1 took six years. The problems for Europe are more acute when Russia stops gas supplies. Solutions for oil can be found by trying and measuring. There are simply no suppliers for natural gas that can fill Russia's gap. Partly because of the infrastructure mentioned earlier, but certainly also in terms of capacity.
Is there enough grain?
The grain market is mainly concerned with uncertainty. Many internationally operating companies have their own offices and transhipment locations. For them, the safety of the staff is their first priority. Ports and also railway lines for supply from the cultivation areas are also military targets. According to insiders, ships currently moored in the Ukrainian Black Sea ports cannot go anywhere. Charging has yet to start or they are just full. Furthermore, it is completely unclear what the damage to the infrastructure is. Even in this digital age, where you can follow soldiers almost in real time, it is still difficult to get an overview of events. A disruption of a few days or longer can easily be handled, as traders are used to after a storm or the like.
However, if the Black Sea remains inaccessible for a longer period of time, things will change. Europe is a net exporter of wheat, so in that respect the consequences are probably not too bad. The situation is different for corn (and especially non-GMO corn that is not widely available on the world market) and vegetable sunflower oil. Alternatives must be sought for this. And the other question that cannot yet be answered: where will countries that normally import wheat from the Black Sea region move to? Europe is a logical choice for regular customers who normally purchase from Africa and the Near East in the Black Sea region.
(Photo: a grain terminal in the port of Odessa (Ukraine) on the Black Sea in 2021.)