Commodities are wrapping up a historic week as Russia’s invasion of Ukraine roils markets, with foodstuffs soaring, metals setting records, and oil in the throes of the biggest crisis for decades.

Commodities
Commodities

The Bloomberg Commodity Spot Index has rallied more than 9% this week. Soaring raw materials prices from crude to aluminum and wheat are adding to already-elevated inflationary pressures, hurting consumers, and fueling concerns over an economic slowdown.

Here are some key takeaways from the turmoil:

  • Supply: The assault on Ukraine and sanctions against Russia unleashed a massive pan-commodity supply shock. Further gains are all but certain, especially for wheat, aluminum, and nickel
  • Crude: Oil also will extend gains as long as buyers continue to shun Russian output. Even if an Iranian nuclear deal is agreed this weekend, the balance of price risks remains to the upside
  • Inventories: The impact of the invasion has been so extreme for commodities as it came as the complex was already at a record, with low stockpiles for many raw materials
  • Inflation: The rally will spur the pace of already-elevated price gains around the world. Fed Chair Jerome Powell notes that rising commodity prices will push inflation higher
  • Shipping: Many Black Sea ports are shut, while some container lines have halted Russian visits. The impact will cascade through supply chains. The crisis will last as long as shipping is disrupted
  • Spending: Russia’s invasion has, in effect, imposed a tax on consumers around the world as they’re forced to pay more for bread, gasoline, and goods. Discretionary spending will drop
  • Recycling: The sharp and sustained rise in commodity prices, especially for base metals, will trigger a boom in recycling as the potential reward from reusing materials increases
  • Output: In time, there will be a supply response from the world’s rigs, pits, smelters, and farms as producers react to the incentive of higher prices. Watch the U.S. shale patch in particular
  • Risks: While the tragedy in Ukraine and the shunning of Russia are the biggest drivers at present, other shocks are possible in an unstable world. Note unrest just shuttered Libya’s largest oil field