Why it matters: The escalating conflict in Iran and surrounding Mideast countries is causing large price swings in energy, currency and equity markets, with that activity spilling into the fertilizer and agricultural markets.

Crude oil futures in London and New York soared almost 30 per cent in early trading to nearly $120 a barrel, one ofthe biggest one-day jumps on record, threatening to raise costs of products from gasoline to jet fuel. The prices then pulled back, with U.S. crude up 7.72 per cent at $97.92 a barrel and Brent at $100.56 per barrel, up 8.49 per cent on the day.

Investor jitters over soaring energy prices meant a wave of global stock and bond market selling which hung over the Wall Street open. In early trading, the Dow Jones Industrial Average 1.4 per cent, the S&P 500 dropped 1.26 per cent, and the Nasdaq Composite slid 1.16 per cent.

Iran named Mojtaba Khamenei to succeed his father Ali Khamenei as Supreme Leader, signalling that hardliners remained firmly in charge a week into the war with the U.S. and Israel.

That was unlikely to be welcomed by U.S. President Donald Trump, who had declared the son “unacceptable.”

With hostilities continuing in the Middle East and tankers unable to cross the Strait of Hormuz amid the threat of Iranian drone attacks, investors were bracing for a long stretch of higher energy costs.

Investors awaited Washington’s response, said Helima Croft, head of global commodity strategy at RBC Capital Markets. “With no clear definition of what winning looks like, it is hard to forecast whether this will be a multi-week or multi-month conflict.”

GLOBAL MARKETS SINK

European shares tumbled to their lowest in more than two months on Monday, with the pan-European STOXX 600 down 1.76 per cent in a third session of losses. The benchmark index shed 5.5 per cent last week, its worst weekly performance in nearly a year.

The oil price spike was sobering for major oil importers in Asian markets, with Japan’s Nikkei .N225 closing down 5.2 per cent after a 5.5 per cent drop.

China, another big oil importer albeit with a huge stockpile of crude, saw its blue-chip index fall roughly one per cent. China on Monday said inflation had already picked up in February before the current oil surge, with consumer prices rising 1.3 per cent on the year, not necessarily a negative development, given the country has long struggled with disinflation.

Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, wrote in a note on Monday that the U.S. equity market may still seem placid but there are “extreme” rotations and stock dispersions beneath the surface.

“Over the past 80 years, war-induced oil shocks have not been kind to equities, as nearly every episode has catalyzed a recession and market sell-off,” Shalett wrote.

CENTRAL BANKS FACE INFLATION CONUNDRUM

In bond markets, the risk of rising inflation outweighed safe-haven considerations to shove yields higher globally. Yields on 10-year Treasury notes rose 2.6 basis points to 4.158 per cent, up from a trough of 3.926 per cent just a week ago.

Interest rate futures slipped as investors feared the risk of higher inflation would make it harder for the Federal Reserve to ease policy, though disappointing U.S. jobs numbers seemed to argue for stimulus.

Data on U.S. consumer prices due on Wednesday is forecast to show the annual rate holding at 2.4 per cent in February.

The Fed’s preferred measure of core inflation due on Friday is forecast to hold at 3.0 per cent, well above the central bank’s two per cent target, and analysts see a risk of an even higher number.

The danger of energy-driven inflation has led markets to wager the next move in rates from the European Central Bank could be up, possibly as early as June.

For the Bank of England, markets have shifted to pricing just a 40 per cent chance of one more easing, compared with two cuts or more before the Middle East conflict started.

Nervous investors sought the liquidity of dollars while shunning currencies from countries that are net energy importers, including Japan and much of Europe.

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“If you don’t think the economy is going to be in a substantial slowdown or recession, the prices are undervalued. If you do think we are going into a global slowdown, the prices have probably more room to fall,” Flynn explained.

“I lean more towards the fact that the market is overdone. We’re going to bottom out shortly,” he added, noting that he expects world supplies to tighten in 2024.

Until then, Flynn said the oil market was suffering from “high anxiety” due to the amount of volatility. One case in point was Saudi Arabia cutting its price for oil on Jan. 8, which saw values for Brent and West Texas Intermediate crude oils get hit hard.

In the same breath, he pointed to the risk to supplies that’s added some cost to oil. Namely the attacks on commercial shipping in the Red Sea being carried out by Iran-supported Houthi rebels in Yemen.

“But the reality is we haven’t seen any major oil disruptions. We haven’t lost too many barrels of oil because of this. Admittedly, [shipments] have been delayed around the Red Sea has added to the cost.

Flynn said there were widespread expectations the price of oil would have jumped with the start of the Gaza war and fears the conflict would spread throughout the Middle East. But such has not occurred so far.

He also pointed to the annual “rebalancing of the commodity index funds” with Bloomberg commodity index and the S&P Goldman Sachs index.

“When they rebalanced those indexes, they had to sell some oil. That put further downward pressure on prices,” Flynn said.

He said the hedge funds built a near-record short position in crude oil, which weighed on values.

“They’re betting on a recession. They keep selling in every rally in oil. They are doom and gloom, and they keep pushing the market lower,” Flynn commented.

“On the flip side of that, if they’re wrong, you can see a major reversal in price,” he added, noting colder temperatures will push up the demand for diesel and natural gas.

— Glen Hallick reports for MarketsFarm from Winnipeg. 

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Trudeau’s Liberal government has implemented a price on carbon to combat climate change, but some lawmakers in his own party have called for changes to the scheme, in particular in Atlantic Canada where a disproportionate number of households use oil to heat their homes.

Trudeau, noting the impact of high inflation, said fighting climate change must be done while supporting all Canadians.

“This is an important moment where we’re adjusting policies so that they have the right outcome,” Trudeau told reporters in Ottawa. “We are doubling down on our fight against climate change … (while) we are supporting Canadians.”

The pause on the carbon tax on heating oil will begin in 14 days in provinces where the federal fuel charge applies, while the higher rebates for individuals and families in rural Canada will start in April 2024.

The increased rebate will be provided by doubling the rural top-up rate on the federal government’s pollution price rebate, otherwise known as the Climate Action Incentive Payment (CAIP), to 20 per cent from the current 10.

In Saskatchewan, for example, for the 2022 base year, an individual resident gets a baseline annual CAIP credit of $680, plus additional amounts per household for spouses/common-law partners and/or children under age 19. The top-up rate applies on the base amount.

“People who live in rural communities face unique realities, and this measure will help put even more money back in the pockets of families dealing with higher energy costs because they live outside a large city,” the government said in a release.

READ MORE: Carbon tax exemption bill C-234 clears Senate committee

Trudeau also announced measures to incentivize Canadians to install electric heat pumps. The government said switching from oil to heat pumps could save homeowners up to $2,500 a year on energy bills.

Canada, the world’s fourth-largest oil producer, is aiming to cut emissions 40-45 per cent below 2005 levels by 2030 and a steadily rising carbon price that will hit $170 a tonne by 2030, from $65 a tonne currently, is a key part of their plan.

The opposition Conservatives have vowed to scrap the carbon tax if they win the next election, set to take place by late 2025.

“After plummeting in the polls, a flailing, desperate Trudeau is now flipping and flopping on the carbon tax as I am holding a gigantic axe the tax rally in a Liberal-held Atlantic riding,” Conservative leader Pierre Poilievre wrote on social media platform X.

Climate and environment groups had a mixed reaction to Trudeau’s announcement.

Climate Action Network welcomed the move to accelerate the heat pump uptake and reduce energy poverty in Atlantic Canada, but others warned temporarily exempting home heating oil from carbon pricing introduced uncertainty.

“It sends the signal to emitters — and investors — that policy can be weakened in the future, diluting the carbon price’s effectiveness in driving the long-term, low-carbon investments required to reduce emissions,” said Dale Beugin, executive vice-president of the Canadian Climate Institute.

— Reporting for Reuters by Ismail Shakil and Nia Williams. Includes files from Glacier FarmMedia Network staff.

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And while that move was bullish for the markets, by how much remains to be seen, said Phil Flynn of the Price Futures Group in Chicago.

“It’s probably put a floor under the price of oil,” Flynn commented. “The question is how high will it go?”

Reports said that in addition to the Saudi cut, the rest of the 23-member alliance would reduce its output by a net 400,000 BPD.

To justify the cut, Saudi Arabia said there’s a looming supply glut in the global oil market that’s already contending with weaker prices.

Flynn said crude oil modestly increased but there were still issues, noting there continued to be tensions within OPEC and OPEC+.

As the week of June 5 started, prices for Brent Crude and West Texas Intermediate gained more than $1 per barrel. However, by mid-afternoon that Monday those gains faded to well below 50 cents per barrel (all figures US$).

Prices are “struggling because the Saudis made some comments…that they’re fed up with OPEC members who aren’t meeting their oil output goals,” Flynn explained, pointing to some of the cartel’s African members.

Also, Flynn said another report on Monday indicated Russian oil loadings at the country’s western ports hit a four-year high in May, as they produced as much as they could and sold it at a discount.

“The Saudis are calling for more transparency from the Russians as to how much oil they are producing,” he added, pointing to Russia previously promising its OPEC+ partners it would reduce its output.

As for Saudi Arabia, Flynn stated the kingdom believes it can push up oil prices and not hurt its share of the global market.

However, he said the current market has been nervous and pessimistic as to what could come down the road. Otherwise the oil market normally looks ahead to see what could transpire.

“They’re erring on the side that demand is going to fall off the map even though that hasn’t happened yet,” Flynn said, noting that supplies remain tight.

North American prices will climb upward again, he added, suggesting gasoline in the United States could reach $5 per gallon.

“But I think the market is going to need a little convincing in the days ahead as to whether the economy can stand this production cut and see if inventories really tighten,” Flynn said.

One wildcard he cited was Russia, as it likely wants to avoid a price war with Saudi Arabia.

“If they don’t keep the Saudis in their back pocket this turns into a price war, and neither one of these countries are going to win,” Flynn emphasized. “But the jury is still out as to whether the Russia can comply.”

It’s estimated OPEC+ is responsible for 40 per cent of the world’s crude oil. The alliance is comprised of the 13 members of the Organization of the Petroleum Exporting Countries and 10 additional members including Russia, Mexico and Kazakhstan.

— Glen Hallick reports for MarketsFarm from Winnipeg.

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The average oil content came in at only 41.3 per cent for the year, which compares with 44.1 per cent the previous year and the five-year average of 44.4 per cent. The oil content marked the lowest level in data going back to 2000, with the next lowest at 41.8 per cent in 2003.

With oil content down, protein levels were up on the year. The average crude protein for No. 1 canola came in at 24 per cent, well above the 20.8 per cent reported the previous year and the five-year average of 20.5 per cent.

“Research has shown that there is a strong inverse relationship between oil content and protein content in canola seeds,” the CGC said.

Warm and dry conditions across the Prairies “were ideal to produce a poor yield for western Canadian canola,” the CGC said in the report. Total production came in at 12.645 million tonnes, according to Statistics Canada, down by 7.64 million from the five-year average.

The overall quality of what was grown was high, with 90.6 per cent of the samples studied grading No. 1. That was up slightly from 90.5 per cent in 2020 and compares with the five-year average of 88.1 per cent.

The best quality crops were seen in Saskatchewan, where 94.3 per cent of the crop reached No. 1. Meanwhile, only 84.2 per cent of samples from the Peace River region of northern Alberta graded as No. 1.

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The WFP’s first take-home rations were distributed for children under six years old at some 277 schools and preschools, as well as school staff, in 25 municipalities in northwestern Falcon state, WFP said in a statement.

Since Venezuela’s schools are closed due to the coronavirus pandemic, parents or teachers picked up the monthly rations — which consist of six kilograms of rice, four kg of lentils, 454 grams of salt and one litre of vegetable oil — on their behalf, according to Susana Rico, the WFP’s Venezuela representative.

“We are reaching these vulnerable children at a critical stage of their lives when their brains and bodies need nutritious food to develop to their full potential,” Rico was quoted as saying in the statement.

Activists had been clamouring for years for Venezuelan President Nicolas Maduro to allow the WFP to distribute food in the country, which contains the world’s largest crude reserves by some measures, as a drop in crude prices and gaping fiscal deficits led to hyperinflation and recession.

Maduro and the WFP reached a deal in April, in what was seen by some analysts and western diplomats as a concession by the government aimed at getting U.S. sanctions on its oil industry lifted.

More than five million Venezuelans have emigrated, according to the United Nations, while some 60 per cent of households live in poverty, according to the Encovi survey by researchers at Andres Bello Catholic University. Some seven million people are in need of humanitarian assistance, according to the United Nations.

WFP aims to feed some 185,000 children by the end of the year, 850,000 by July 2022 and 1.5 million by 2023.

— Reporting for Reuters by Vivian Sequera.

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The effort marks an unusual attempt by the petroleum industry to cozy up to its longtime rivals, reflecting the scale of its concern over President Joe Biden’s sweeping measures to combat climate change and tamp down fossil fuels.

While the oil industry and biofuels producers are natural competitors for space in America’s gas tanks, they share a desire to ensure a future for internal combustion engines.

The effort also reflects the rapidly shifting political landscape in Washington: the oil industry’s once-mighty influence has waned since Biden replaced Donald Trump as president, but the farm belt remains a vital and powerful political constituency.

The American Fuel and Petrochemical Manufacturers oil refining trade group confirmed it has been contacting state and national representatives of the corn and biofuel industries in recent weeks to seek support for a policy that would reduce the carbon-intensity of transport fuels and block efforts to provide federal subsidies for electric vehicles.

That proposal would be an alternative to Biden’s stated goal of electrifying the nation’s vehicle fleet and would ensure a continuing market for liquid fuels like gasoline and corn-based ethanol.

AFPM met in mid-January with some corn and biofuel industry lobbyists and some member refiners are hoping to host another meeting in February to discuss the future of liquid fuels.

“This whole idea was going to have to take a whole lot of time to gel, but we have made some progress,” said Derrick Morgan, senior vice-president at AFPM.

The industry’s push to change the course of electric vehicle policy faces big headwinds: California has announced a ban on internal combustion engines by 2035, other states are considering similar measures, and automaker General Motors on Thursday announced it will produce only electric vehicles by then.

Geoff Cooper, head of the Renewable Fuels Association, a leading biofuel industry trade group, confirmed RFA representatives were invited to participate in the February meeting, but said his organization had not yet decided whether to attend.

“We weren’t born yesterday and we’re not going to let the oil industry play us like a fiddle,” he said. “They have a long history of pushing surrogates and proxies to the microphone to do their dirty work and we’re not interested in that.”

The National Corn Growers Association is also considering whether to send staff the February discussion, according to two sources familiar with the matter.

NCGA CEO Jon Doggett told Reuters no such meeting had been scheduled, and distanced his group from the idea of an oil-corn alliance. “I have nothing to do with any refining groups. We haven’t talked,” he said.

Asked if any of its state-level member organizations were considering attending, Doggett replied, “We have dozens of groups. I can’t know what all of them are planning.”

Sources said the biofuel and corn industry is reluctant to join with the oil industry on this issue not just because of its longstanding rivalry with refiners, but also because it does not want to publicly oppose the energy policies of the new president.

Whiplash in Washington

The refining sector enjoyed a seat at the table under former President Donald Trump, who was keen to bolster the oil and gas industry.

Biden marks a complete reversal. He entered the White House promising measures to restrain the oil industry, from pausing new drilling leases on public lands to contemplating tougher limits on emissions.

Biden this week pledged to buy 645,000 electric cars for the government vehicle fleet as part of a broader plan to advance EVs through vehicle procurement, infrastructure development and subsidies, threatening the multi-billion dollar gasoline market.

AFPM’s Morgan said refiners are not scared of electric vehicles but dislike rigid government mandates. “What we have a problem with are heavy-handed mandates that take away consumer choice, either altogether or in large part. We don’t think that’s the right way forward,” Morgan said.

The oil industry believes carbon emissions from fuel can be reduced by requiring increased octane content, which makes gasoline burn cleaner. Ethanol is a popular octane booster.

The U.S. Renewable Fuel Standard currently requires refiners to blend biofuels like ethanol into fuels. As a result, most gasoline sold in the U.S. has about 10 per cent ethanol in it. The biofuel industry has been pushing hard to ensure those mandates continue.

“It’s no surprise the oil industry all of a sudden wants to give us a bear hug. We produce lower carbon fuels. They don’t,” said Emily Skor, head of the biofuel group Growth Energy.

— Reporting for Reuters by Jarrett Renshaw and Stephanie Kelly.

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U.S. President Donald Trump’s Environmental Protection Agency (EPA) is requesting comment on the potential general waiver for the 2019 and 2020 compliance years and also is proposing a new rule that would remove or alter the labeling for retail gasoline that contains higher ethanol blends, according to notices to be published to the Federal Register on Tuesday.

The proposal for a general waiver could open the door to a contentious debate between the oil and biofuel industries just as Trump leaves the White House.

It is unclear whether the next EPA under President-elect Joe Biden, who takes the oath of office next Wednesday, similarly would consider the requests for a general waiver, as the comment period on the requests ends after Trump will have already left office. Both the EPA and Biden’s transition team did not respond to requests for comment by the time of publication.

While the waiver would save the refining industry money at a time of low fuel demand, biofuels advocates harshly oppose the idea, arguing it risks hurting farmers by undermining demand for products such as corn-based ethanol.

In its notice, the EPA said that it had received requests for a general waiver from both refineries and from the governors of several states hosting them.

“These petitions argue that recent events warrant EPA exercising its general waiver authority on the basis of severe economic harm,” it said.

Biofuel groups criticized EPA’s decision to consider the petitions.

“It cannot succeed because EPA has no authority to waive RFS (Renewable Fuel Standard) volumes unless the petitioners show that the RFS itself is the cause of the ‘severe economic harm’ to a state, region, or the nation,” said Renewable Fuels Association president Geoff Cooper.

The biofuel industry, however, supports a labeling change for high ethanol blends of gasoline because it believes current labels that warn of potential engine complications from ethanol can discourage consumption.

Oil industry groups vowed to challenge that proposal.

“We are deeply concerned about the administration’s reckless proposal to deprive consumers of basic information concerning their engine’s compatibility with fuels they purchase,” said a statement from groups including the American Petroleum Institute and the American Fuel and Petrochemical Manufacturers.

Under U.S. law, refiners have to blend billions of gallons of biofuels into their fuel mix or buy tradable credits from those that do. Those credits traded on Friday at 84 U.S. cents each, down from 90 the previous session, traders said.

Earlier this week, the EPA signaled it would not act on a slew of pending individual waiver requests submitted by refining facilities because of pending litigation.

In the same document, the agency said it was also proposing to further extend the deadlines for oil refiners to prove compliance with the RFS for both the 2019 and 2020 years.

The EPA’s moves this week follow a year of suppressed demand and weak margins for oil refiners and ethanol producers because of the COVID-19 pandemic.

— Stephanie Kelly reports on the U.S. energy and biofuel sectors for Reuters from New York.

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The decision came after appeals by refining companies that argued the 10th Circuit Court’s decision last year had improperly deprived them of a method to avoid financial hardship granted by Congress.

Under the U.S. Renewable Fuel Standard, refiners must blend billions of gallons of corn-based ethanol and other biofuels into their fuel or buy credits from those that do — a law meant to help farmers and reduce dependence on foreign oil.

But small facilities under financial stress can also seek waivers from the obligation, and the Trump administration has dramatically ramped up the number of such exemptions granted to the industry — angering biofuel producers that claim the waivers undercut demand for their products.

After a challenge from biofuel industry groups, the 10th Circuit ruled last January that the U.S. Environmental Protection Agency can only grant the so-called Small Refinery Exemptions to facilities that have received them continuously each year since 2010. That decision cast doubt over the entire waiver program, since most of the refineries securing waivers in recent years have not secured them continuously.

“We are disappointed in the Supreme Court’s decision to review the case but will continue to vigorously pursue a resolution to the damage that small refinery exemptions do to the biodiesel industry,” said Kurt Kovarik, spokesman for the National Biodiesel Board.

The Fueling American Jobs Coalition, which advocates on behalf of refiners, cheered the Supreme Court’s decision, saying the review comes at an “urgent time” for refiners battered by the economic downturn.

The court is expected to hear the case in April, and a ruling could take several months.

— Reporting for Reuters by Stephanie Kelly; writing by Richard Valdmanis.

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Increases were reported throughout the canola and soybean crushes when comparing this October with October 2019.

October 2020 saw 931,060 tonnes of canola crushed, which bested the previous record of 899,331 tonnes set in December 2019. Also, the October 2020 canola crush was a 5.5 per cent improvement over the crush the same month in 2019.

From this October’s crush came 400,909 tonnes of canola oil, for an increase of 4.7 per cent compared to the amount of oil produced in October 2019.

There were 531,444 tonnes of meal from the crush, eight per cent more than was produced the previous October.

Statistics Canada also reported a soybean crush of 160,074 tonnes, up 7.6 per cent from October 2019.

The amount of soyoil produced this October came to 29,499 tonnes, a 9.2 per cent increase over last October.

There were 123,084 tonnes of soymeal last month versus 114,576 tonnes last year.

Table: Canada’s canola and soybean crush, in tonnes. Source: Statistics Canada.

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