Russia supplies around 19% and 18% of global wheat and barley exports, while Ukraine's exports of wheat, corn, and sunflower oil make up about 8%, 13%, and 46% of global trade. (UBS)

Disruption to supply arising from the war in Ukraine have been relatively contained. Russian gas continues to flow, and metal exports have been largely undisturbed. Crude oil exports from Russia have increased so far in April versus February and March.


But we don’t think the rally in broadly diversified commodities is over. The CMCI has already returned 4% since the start of April, and upward pressures remain in energy, industrial metals, and grains.


Global supply capacity for oil remains limited. With only two countries in the OPEC+ alliance holding significant spare capacity (Saudi Arabia and the UAE), the group is sticking to a cautious approach in unwinding pandemicrelated production cuts. Demand concerns driven by mobility restrictions in China are likely to support this stance.


The US fracking industry, another potential source of oil in the short run, is struggling to increase output, with companies sticking to their capital discipline strategy. Strategic oil reserve releases will not fix the structural imbalances resulting from years of underinvestment at a time of recovering global demand for oil.


Industrial metal supply struggling. While Russian exports of industrial metals can be relatively easily redirected, markets were already tight at the turn of the year. Higher energy costs are exacerbating material production problems in Europe, mainly in aluminum and zinc. The result is a further tightening in supply. We reiterate that almost all base metal markets are set to be under supplied this year.


Grain supplies continue to be disrupted. Russia supplies around 19% and 18% of global wheat and barley exports, while Ukraine's exports of wheat, corn, and sunflower oil make up about 8%, 13%, and 46% of global trade. The war's impact on Ukraine's production and exports is severe, with Ukrainian agricultural consultancy UkrAgroConsult forecasting a halving of the corn and wheat harvest along with a 30%-40% decline in sunflower seeds.


While there are no official sanctions on Russian grain, self-sanctions have been imposed by some commodity traders, providers of trade commodity finance, and grain vessel owners. And even before the war, Russia introduced a floating export tax in June 2021 to curb exports due to high domestic food prices. Finally, disruptions impact fertilizer access in Brazil, India, and other developing countries more than in the developed world. For example, around 50% of Brazil’s imports of potash have typically come from Russia or Belarus.


So we see room for another 10% move up in total return indexes over the next six months. Hence, we continue to advise investors to stay long commodities, with a preference for active commodity exposure. Alternatively, investors who do not seek outright long exposure to commodities and have a lower risk appetite can engage via yield pickup strategies, for example volatility-selling with commodities as the underlying asset.


Main contributors - Mark Haefele, Giovanni Staunovo, Dominic Schnider, Wayne Gordon, Christopher Swann, Jon Gordon


Content is a product of the Chief Investment Office (CIO).


Read original report - The commodity rally may have further to run, 20 April 2022.