July 18, 2014
Downed Jet Fuels Commodities Rise
Midday Thursday, a Malaysia Airlines flight crashed in Eastern Ukraine, killing all 298 people aboard. Initial fears that the plane had been shot down were supported by intelligence agencies, sparking concerns that the crash could signal a deepening of the conflict between Ukraine and pro-Russian separatists. As global investors processed the news, they sold off stocks and bought commodities that could be in short supply if sanctions or increased military conflict followed the plane crash.
The primary issue on commodities traders’ watch list is whether pro-Russian forces will be implicated in the plane crash, which could lead to a fresh round Western sanctions against Russia. If trade between Russia and the West suffers, one of the worst-hit markets could be palladium, since Russia mines nearly forty percent of the world’s supply.
Prices have been climbing steadily since the outbreak of the crisis in Ukraine, but they took a sharp turn higher after the plane crash. On Thursday, palladium prices spiked to a thirteen-year high, peaking out at $890 per ounce.
Although few Americans ever buy palladium directly, the metal is an important (and expensive) component in catalytic converters, which reduce the toxicity of automobile exhaust.
Wheat Whips Higher
Of all the agricultural commodities, wheat was the most reactive to the news, as Ukraine and Russia are two of the world’s top wheat exporters. Should the military conflict deepen, it could interrupt the countries’ abilities to plant and harvest grain. Meanwhile, sanctions against Russia could reduce the flow of wheat onto global markets.
As a result, wheat rallied over thirty cents per bushel as the story broke, with September Chicago wheat reaching $5.61 on Thursday, before falling back on Friday as the market awaited further developments.
Crude Spurts Skyward
Crude oil futures also gained on fears that sanctions could limit the flow of oil from Russian, the world’s second-largest exporter.
Adding further fuel to the fire in the crude market, Israel invaded the Gaza Strip on Thursday, underscoring the crisis-level instability in the Middle East. Although Israel is not a major oil exporter, crude traders feared spillover effects in neighboring countries.
By week’s end, crude oil was trading for $103 per barrel, up nearly $4 from its low on Tuesday.