Gulf war impacts global commodities

Oil does not provide quick relief

The basis of the current market volatility is oil. Prices have skyrocketed since the US and Israel launched attacks on Iran on February 28, resulting in retaliatory strikes and effectively closing the Strait of Hormuz – a maritime chokepoint that normally handles more than 20 percent of the world’s oil supply.

In volatile trading this week, US crude oil jumped 10 percent and crossed the level of US $ 110 per barrel. Brent, the international benchmark, is trading above US$108, up 6 percent.

The disruption sent Brent crude soaring more than 60 percent in March alone, its biggest monthly price rise since records began in the 1980s.

The most recent surge comes after US President Donald Trump’s address on Wednesday (April 1). Although he halted attacks on Iranian energy facilities until 6 April, he promised to proceed further “extremely hard” There will be attacks in the coming weeks and no structured path to a ceasefire.

Regarding the vital shipping lane, Trump said simply, “The strait will open naturally.”

The lack of a diplomatic solution has forced markets to pay a price in an extended conflict.

“The Gulf conflict is going to last more than three weeks. Even if the United States withdraws, Iran could keep fighting,” said Simon Evenet, a professor of geopolitics and strategy at Switzerland’s IMD business school. told CNBC in an email.

“Claims that Tehran’s capabilities have been exhausted are exaggerated. Iran could maintain its dominance over the Strait of Hormuz. Oil prices will rise sharply. Material shortages will emerge. Destruction of demand has become a necessity.”

Destruction of demand may happen sooner rather than later. In the US, the national average for unleaded gas has reached US$4.08 per gallon, up from US$2.98 before the conflict. Diesel sits at US$5.51. In Europe, eurozone inflation rose to 2.5 percent in March.

has a direct impact on aluminum

Benchmark three-month aluminum on the London Metal Exchange (LME) rose 5.9 percent to US$3,492 a tonne earlier this week, on track to a four-year peak.

Irani started the rally Missile and drone attacks Two major smelters were targeted over the weekend: Emirates Global Aluminum (EGA) in the United Arab Emirates and Aluminum Bahrain (Alba).

The Middle East produces about 9 percent of the global aluminum supply. EGA and Alba are among the world’s largest single-site smelters, each producing about 1.6 million tonnes last year.

The attacks caused power outages at the EGA site, leading to uncontrolled shutdowns of its smelting potlines. In aluminum production, a sudden loss of power causes metal to freeze inside the circuit, resulting in catastrophic damage that takes enormous time and capital to repair.

alba has already started closing lines representing 19 percent of its capacity, while EGA confirmed that its plant had suffered “significant damage”.

With LME-approved warehouse stocks already down more than 60 percent since last May, continued cuts in the Gulf will leave manufacturers across Europe, Asia and the Americas struggling for supply.

copper tug of war

Copper is caught in a tug-of-war between the threat of a global recession and looming production disruptions.

Initially, the metal was crushed. Between February 27 and March 23, the LME price of copper fell 9.4 percent to US$12,081.74 per metric tonne. Investors sold the metal on fears that higher energy prices would stall the global economy, with global reserves exceeding one million metric tons for the first time since 2003.

However, copper has pared some losses recently, hitting a two-week high of US$12,365 per metric tonne on Wednesday (April 1).

The surge was driven by brief hopes of the war easing, supported by strong Chinese manufacturing data and a decline in Shanghai Futures Exchange inventories.

But copper faces a hidden supply threat from the Gulf War: sulfuric acid.

About half of the global sulfur trade originates from the Middle East, much of it passing through the Strait of Hormuz.

Sulfur is essential for the production of sulfuric acid, which is used in the solvent extraction/electrowinning (SX/EW) method, which accounts for 16 percent of global copper production.

Robert Friedland, Executive Co-Chairman of Ivanhoe Mines (TSX:IVN, OTCQX:IVPAF), posted a warning On social media on March 4: “If the disruption lasts more than ~3 weeks, copper oxide operations will have to shut down because they have run out of acid.”

Precious metals are destroyed

The biggest shock so far in the commodity sector is the fall of gold and silver.

Historically, investors are attracted to precious metals during geopolitical crises. This time, they are selling them at a historic pace.

On April 2, gold fell 4 percent to US$4,615.00 an ounce, while silver fell 8 percent to US$69.84. It follows a brutal March where gold fell more than 10 per cent, its biggest monthly decline since June 2013, while silver fell 19 per cent, its worst month since 2011.

Selling is going on in the bond market. Rising oil prices have stoked persistent inflation fears, raising expectations that central banks will keep interest rates high for longer.

As a result, the US dollar has strengthened, and 10-year Treasury yields have risen to 4.37 percent. Higher interest rates increase the opportunity cost of holding non-yielding assets like gold, while a stronger dollar makes bullion more expensive for foreign buyers.

The sharp decline was also being fueled by panicked funds liquidating their positions to cover margin calls in a falling stock market.

Despite the crash, some major banks are showing improvement. Goldman Sachs (NYSE:GS) analysts wrote in a Comment They are still bullish on gold: “Our base case assumes no further liquidation of the gold private sector nor any additional private sector diversification into gold (other than a modest boost from Fed cuts).”