Market volatility increases as two wars continue to rage

It seems like Groundhog Day in the markets with the return of war to the Middle East in mid-July.

Predictably, crude oil rallied on the resumption of hostilities, which in turn supported the vegetable oil complex.

Crude oil (WTI) was trading slightly less than US$80 per barrel last week with Brent futures trading over $85 per barrel. These are the highest prices for crude oil since the middle of June.

Diesel prices are the key issue for agricultural markets because it is both an input and source of demand for vegetable oil.

The Canadian wholesale price for diesel has jumped to C$1.61 per litre for the week ending July 14. This is the highest price for diesel fuel since the last week of May.

Wholesale prices for diesel fuel peaked during the first week of April at $1.83 per litre.

The higher prices for diesel fuel are increasing demand for vegetable oil to blend into biodiesel. This is happening across the globe, especially in Asia.

Soybean oil futures rallied above US70 cents per pound. These are the highest prices for soybean oil since the middle of June.

Canola futures have also rallied by more than C$30 per tonne from the beginning of July. Canola was trading last week near the $780 per tonne mark, which is just below the highs set in early June when it was higher than $800 per tonne.

The war in the Middle East has had only a minor impact on grain prices, but the recent escalation in the Russian-Ukrainian conflict has supported wheat prices.

‘Forever’ wars a possibility

Wheat futures jumped last week as concerns escalated over the closure of shipping through the Sea of Azov. This means that shipments through the Port of Rostov will have to be diverted to the port of Novorossiysk.

Ukrainian drone attacks are certainly threatening Russia’s ability to export grain.

At the same time, Russian attacks on port facilities in Ukraine continue to rise.

Wheat, corn and oilseed exports from both Ukraine and Russia seem to be increasingly under attack. This escalation should be a concern for the wheat market because Ukraine and Russia are expecting bumper crops this year. Any disruption to exports from both countries will certainly have an impact on prices.

Managed money funds hold a net short position in both Minneapolis and Chicago wheat markets. This leaves wheat futures vulnerable to a short covering rally if the situation escalates in the Sea of Azov.

Wheat prices have rebounded off of their late June lows and are now trading near values not seen since late May.

Marketing in times of war is very challenging, but it seems as if we need to get used to it.

The war in Ukraine has already lasted for almost 4.5 years and there is no end in sight. The war in the Middle East seems also to have all of the hallmarks of a “forever” war.

Markets have had a tendency to look past these conflicts with the assumption that they will end in a relatively short period of time.

The current dynamic in both conflicts calls this assumption into question. This unfortunately means that volatility from external conflicts will continue to be a feature of the marketing landscape for many more years.