Oil adds strength to wheat

A new battle front has opened up in the Middle East between Israel and Iran. Markets reacted strongly, especially in the energy sector. Both countries have been trading missile strikes with some of them reaching the nuclear facilities and oil and gas fields of Iran.

This is a fast moving situation and the markets are clearly on edge. One report is suggesting that Iranian leadership has fled. Another is suggesting they are reaching out to negotiate to avoid the carnage. Another is suggesting that they’re in it for the long haul.

Crude oil will be the key market to watch. Iran controls the Strait of Hormuz, which transports about 20% of the world’s oil and about 30% of the world’s LNG. This new flashpoint has seen the spot crude market jump 12% for the week, as the potential for oil supplies being cut, as well as the associated risks of shipping through a conflict-affected region, adds value to the energy sector.

This new front was the catalyst wheat needed to rally. The CBOT Dec ’25 contract jumped 25c/bu as market participants were digesting the triple whammy of a delayed US HRW harvest due to wet weather, a heatwave in northern Europe casting doubt on the crop’s ability to finish, and some Russian states declaring a ‘state of emergency’ as drought takes a bite out of production. (Note – the SOE is an administrative move by the provinces in question to allow farmers to access drought funding.)

While there is some fundamental weight behind the gains, the rally was largely technical in nature. The wheat market is heavily short (sold), and some of the poorly positioned contracts held by fund managers were at risk of going underwater. This was a ‘short covering rally’, which typically occurs when the owners of these contracts buy back their positions to avoid financial losses. These rallies can be sharp but are generally short-lived. The fact that US markets were closed last night for a public holiday may have prevented follow-through strength.