Market Information

At the outset of the Iranian conflict, the prices of many commodities rallied in response to the closure of the Strait of Hormuz.  Fears of shortages of many goods, most notably oil, LNG and fertilizer brought strong price response to these items.  But some of the greatest fears that were present in these markets did not readily appear as acutely as was anticipated, and the sharp rally gave way to weakness.  Prices retreated to similar levels to where they were prior to the conflict.  Oil fell aggressively, as tankers that were trapped in the blockade eventually made their way onto the market, as a wave of supply hit the scene.  But that whole narrative is now in the past and the developments that will occur in this region are too volatile to predict.  On any given day the conflict could flare up again, and the original market concerns could rally prices all over again.

The world would be less prepared for another closure than last time.  The strategic oil reserves that are held in many countries for such cases are now depleted, removing this buffer capacity from the system.  South America is in need of fertilizer for their upcoming planting window, and as we know much of their fertilizer comes from the middle east.  And so while the prices have relaxed with some navigation in the strait, prices could rebound into the future.  As of mid-July, we see the conflict escalating once again, with the US resuming military operations.  And while this conflict has been all the news, it might not be the only conflict that may be shaping energy and grain prices moving forward.

The long-standing Ukraine/Russian war has been raging for many years, ongoing since winter 2022.  At the beginning of this war, recall that grain prices rallied extremely high, along with oil prices.  This occurred, because Russia is not only a major oil shipper, but along with Ukraine they grow grain that feeds a vast amount of the world population.  Remember the fears at that time, which were such as: grain won’t get planted, it won’t get shipped, navigation would cease from the region, along with many other concerns.  But eventually, these fears did fade, as crops were planted and grain found other ways to get to market.   Production and logistics were very resilient.  Because of the consistency in the region’s shipments, markets have not been pricing in concerns with this conflict, despite the ongoing tragedy of war.  But as the facts change, even as the outlook changes, markets react.  Fears are now rising in the grain markets, as the situation in Russia is making a noticeable change.  Instead of the Ukraine losing ground, they are now re-taking territory that they had lost.  And the reason for this, is the developments that they have achieved with drone technology.  This drone technology has the potential to indirectly change world grain prices substantially.

With drones that can now attack deep within Russia, Ukraine has been changing their strategy and the dynamic of the war.   Recently Ukraine has attacked Russian refineries daily, and the damage they have inflicted has been substantive.  Because of the damage to these refineries, gasoline, jet fuel and diesel are all in short supply in Russia, turning Russia into an importer of refined fuel as they are unable to process enough for their needs.  The Ukraine has even been enacting damage to Russian vessels that have been navigating from the Sea of Azov through the Kerch Strait.  Ukraine has been extremely successful in targeting vessels in this area, with the purpose of preventing supplies from reaching military installations.  And because of the success, Russia has closed off vessel flows through this strait.  This is exactly Ukraine’s strategy.  The life blood of an army is diesel.  Remove the diesel, remove the aggression.

And this is where we come to the grain markets.  The fuel shortages in Russia may affect Russian wheat harvest.  With long line ups reported for refueling, will harvest crews have fuel to get the crop off in a timely fashion?  If harvest is delayed, will there be quality issues that degrade the crop demand?

But the fuel shortage may not even be as impactful as the closure of vessel traffic from the Sea of Azov.  This is because 30% of Russia’s harvest time exports sail to market from Azov.  So the question the market is asking is how long will this closure remain?  If the duration is short, then it is an insignificant inconvenience at best.  However, if the closure persists through the critical period of July through September, then world markets would react.  What is expected today is that grain from the draw area which would flow through the Kerch strait would need to find alternative, less cost-effective ways to market.  This in turn supports world values, depending on the magnitude of the closure.  The market has been generally cautious in trading this potentially bullish scenario.  The market needs certainty and proof that supply disruptions will occur before reacting aggressively.  But with two significant wars potentially increasing, grain prices have taken notice.