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Our Materials Price Index (MPI) fell 6.3% last week, the index's
first decline of 2022. Price declines were broad with nine out of
ten sub-components in the index falling. Despite last week's drop,
commodity prices still sit above the previous all-time high set in
April 2011.
Falling energy prices were the principal reason for MPI's
decline last week, with the subcomponent diving 11.4%, its second
consecutive double-digit drop. Price declines last week were
concentrated in Asian and European natural gas and oil in the
United States, Asia, and Europe. Energy prices will be volatile for
the immediate future as markets adjust assumptions about Russian
oil and gas supply and how strong global demand will be. Energy
prices remain high, however, despite their recent correction and
are expected to remain strong for the rest of 2022. Limited spare
capacity in oil markets, low natural gas inventories in Europe and
Asia, and the general uncertainty surrounding sanctions and buyer
boycotts will keep markets stretched. The invasion of Ukraine is
uniquely enhancing energy demand transportation segments as air
freight and oceangoing shipping use longer routes to avoid conflict
zones. Freight rates climbed 7.7% last week, the sole subcomponent
in the MPI to rise.
While commodity prices fell this week, prices remain high with
markets far from calm. The tightening in trade finance reflects
this heightened uncertainty. Higher initial margins on futures
contracts and difficulties in securing letters of credit have
pushed traders, investors, and even physical users to the
sidelines. The net result has been a drop in open interest and, in
turn, liquidity in many commodity markets, aggravating volatility,
a condition that will continue into the second half of the year,
compounding problems for supply chains.
Posted 25 March 2022 by Tal Dickstein, Senior Economist, Pricing and Purchasing
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
