Russia Sanction Fears Push Raw Materials to Record Backwardation

(Bloomberg) -- Traders are paying the highest premium on record to secure commodities immediately as Russian supplies of everything from oil to coal struggle to find purchasers.

Spot commodity prices are the highest ever relative to materials for delivery a year from now in a widely watched market condition known as backwardation.

Buyers are increasingly worried that Russia will become a no-go zone for commodity purchases even though sanctions over the invasion of Ukraine have thus far exempted natural resources.

Foreign refiners are seeking alternatives to Russian oil and trading houses can't find buyers for cargoes. In the latest blow, Alcoa Corp. said it's halting all purchases from Russian suppliers.

The 23 energy, raw-material and crop futures that make up the Bloomberg Commodity Index widened to more than 12% of equivalent, one-year forward contracts as of the market close on Wednesday, according to Bloomberg calculations. That's the highest month-end backwardation rate in data going back to 2007.

While the reopening of major economies from lockdowns unleashed pent-up demand for motor fuels and factory materials, new mining and oil production stalled while inclement weather damaged crops. To make matters worse, Europe went through an unprecedented winter energy crisis, and then Russia invaded its neighbor, clouding the outlook for one of the world's breadbaskets of wheat and energy.

In raw-material markets, futures are typically pricier at longer maturities to reflect the cost of storage over time as well as future demand expectations -- a structure known as contango. But when scarcity fears grip a market and demand already is robust, the structure can flip into backwardation.

Front-month deliveries for commodities such as crude, natural gas, corn, soybean, sugar, coffee and copper are all currently trading at premiums to longer-term contracts.