European natural gas prices have eased significantly over the last month. In fact, prices are at their lowest levels since the start of the war. This is despite Russia having stopped gas supplies to Bulgaria, Finland, Poland, and more recently the Netherlands. These four countries made up roughly 13% of Russian flows to the EU in 2021. These buyers refused to agree to a new payment mechanism where they open a Gazprombank account to pay euros or dollars, which would then be converted to roubles. This is despite the European Commission suggesting that paying into a Gazprombank account should still be allowed, as long as the transaction is complete once euros or dollars are paid into the Gazprombank account, rather than after the conversion to roubles.

Fundamentally, the European gas market is in a more comfortable state. European gas inventories are 46% full compared to the five-year average of 49%, and above the 37% seen at this stage last year. Strong LNG imports have helped to improve the supply situation in Europe. And if we do not see any disruption to Russian gas flows this summer, European gas inventories should be more than comfortable going into the next heating season. However, no disruption to Russian gas flows is a big assumption to make. Additional buyers could refuse to accept Russia's new payment terms, which would see further gas flows from Russia cut. There is also the potential that Russia retaliates to the EU oil ban by stopping or significantly reducing gas flows. It is due to this uncertainty that we believe European gas prices will remain well supported as we head into the next heating season.

European gas inventories (% full)

Source: GIE, ING Research

Ukrainian supply hit and protectionist measures in agricultural markets

Disruption to Ukrainian agricultural exports remains a concern for global markets. Grain exports from Ukraine remain significantly affected. Exports are not possible through ports, so instead, we are seeing volumes transported via neighbouring countries. However, capacity constraints mean the volumes are significantly lower than what can be shipped via Black Sea ports. Over the first 19 days of May, Ukraine managed to export 643kt of grains (of which 96% was corn), compared to a little over 1.8mt in May 2021. There are efforts to remove blockades of Ukrainian ports. However, this will likely be difficult given that Russia will want some concessions to be made before doing so.

The impact of the war has not only had an effect on 2021/22 shipments, but it will also have longer-term effects, specifically on 2022/23 output. Ukrainian corn and sunflower seed production are expected to be down 54% and 37% respectively due to lower plantings, whilst wheat (of which most would have been in the ground prior to the war) is also likely to suffer in the 2022/23 season, with output expected to fall by 35% year-on-year.

The expected decline in Ukrainian wheat supply, along with some declines from other regions, means that global wheat stocks are expected to decline to their lowest levels since 2016/17. However, more than 50% of global wheat stocks are estimated to sit in China (and are unlikely to ever be exported). Looking at ex-China stocks gives better insight into how tight the market is. Ex-China wheat stocks are forecast to finish 2022/23 at their lowest levels since 2008/09, which suggests that wheat prices will continue to trade at elevated levels.

Global wheat market to continue tightening

Source: USDA, ING Research

It is very clear that Russia’s invasion of Ukraine has sparked concerns over food security. There is the direct impact in the form of lost Ukrainian supply, whilst there is also the indirect impact where higher fertiliser prices potentially have an impact on global agricultural yields. Governments will want to avoid a repeat of the Arab Spring that we saw a little more than a decade ago. For some, it is too late. Sri Lanka is a good example of how food shortages have already contributed to unrest. There will be a push by governments to ensure adequate food supply and attempts to rein in domestic inflation, particularly in some emerging markets. Recently, we saw Indonesia briefly ban palm oil exports, India surprised the market by banning wheat exports, which was then followed by the Indian government also imposing a 10mt export limit for sugar this season, and finally, Malaysia has banned the export of chicken. As concerns continue to grow, we could very well see this protectionist stance spread. This leaves a scenario where key importers scramble to boost stockpiles, whilst some exporters limit flows. Overall, this would be a bullish scenario for agricultural commodity prices.

Tags
Wheat Russian oil ban Russia-Ukraine Natural gas Food inflation

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This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more