LiveWire

Commodity prices hit a record in the aftermath of Russia's invasion of Ukraine. Aluminum surged to a record, while wheat hit its highest level in 13 years, in a volatile start of the week as the new Western sanctions raise the potential for supply disruptions. Investors believe the latest measures could make paying suppliers difficult, and prompt banks to further curtail financing for purchases of Russian goods. Russia and Ukraine together have a quarter of global wheat exports and a fifth of corn sales. Ports in Ukraine are closed and traders are staying away from Russian grain. Russia is also a major supplier of Aluminium, nickel, palladium, oil, and gas. In the middle of the uncertainty, commodities are proving themselves to be a strong portfolio hedge. High prices are a market negative, however, that has the potential to keep inflation levels elevated for longer. 

Supply-demand imbalances and geopolitical tensions have pushed commodities prices to record highs. With price pressure looking set to continue well into 2022, the tendency is for companies to raise prices to curb costs increase. Consumer staples particularly face challenges of having to rise prices to pass along the increase in raw materials to consumers, just to keep up with the same profitability. On the flip side, some sectors such as banks and commodities, driven by oil and gas, metal, and mining, can benefit from inflation and tighter financial conditions. 

Industrial metals' risks are heavily skewed to the upside. As global re-growth from the pandemic and booming demand from infrastructure and socially conscious sectors are setting a fire under major metals. Almost all base metals traded in London and Shanghai are in ("super")-backwardation, where prices for immediate deliveries are higher than benchmark contracts, signaling tight supplies. Some even believe that a commodity super cycle is underway. The best performing metals for 2021 were the following: 
Aluminum 42.2%, Zinc 31.5%, Nickel 26.2%, Copper 25.7%

Light investor positioning in largest commodity funds suggests investors are not entirely confident in the sustainability of the rally in oil. The rally which started in November, is simply not supported by investors inflows into commodity ETFs. Additionally, net positions in oil futures contracts also show a reading 31% below the level of June 2021 and well below the peak of early 2018. This suggests investors have favored reducing overall positions to protect portfolios as they attribute current rise to  "transitory" supply shocks and geopolitical tensions. 

Fears of escalating tensions in Ukraine is keeping gold near USD1'860, a 1-month high. A strong USD, however, is capping gains for gold, as the perspective of rising interest rates is incentivising investors to hold onto USD positions. On a technical picture, the metal has broken out of its descending triangle pattern, which is typically seen as an encouraging sign for further upside potential.