Commodities Weekly Summary: Oil’s Grip on Macro and Markets Remain Firm
Author: Ole Hansen, Head of Commodity Strategy
Key Points
- Crude oil continues to influence inflation expectations, bond yields, currencies, and risk appetite.
- Gold shows elevated inverse correlations with crude oil, yields, and the dollar.
- Copper finds support from demand linked to AI infrastructure and electrification.
- Grains are supported by weather risks and renewed expectations for stronger Chinese demand.
- Cocoa prices may be recovering after a significant price collapse.
Market Overview
The Bloomberg Commodity Total Return Index is experiencing a modest weekly loss, reducing its year-to-date gain to approximately 29%. Losses in softs, livestock, and energy were partially offset by gains in industrial metals and grains. Precious metals have softened after a strong rebound earlier in the week.
Despite recent corrections, commodities are outperforming traditional asset classes. The market is shifting from broad-based geopolitical buying to a more selective approach, with individual sectors trading based on specific fundamentals.
Crude Oil: The Market's Macro Thermostat
Brent crude oil prices fluctuated between USD 112 and USD 102, influenced by geopolitical developments, particularly regarding US-Iran relations. By the end of the week, prices rebounded to around USD 105 due to comments from Iranian leadership and ongoing disputes affecting supply routes.
Oil is acting as a macro thermostat, affecting inflation expectations and influencing bond yields and risk appetite. Recent economic data indicates a slowing global economy with rising inflation pressures, resembling a supply-driven economic shock.
Factors Affecting Oil Prices
Despite significant disruptions, oil prices have not surged higher due to several mitigating factors, including strategic reserve releases, rerouted exports, and reduced Chinese imports. High prices are also leading to demand destruction, as consumers and governments adjust consumption patterns.
The upcoming peak summer fuel demand, combined with ongoing disruptions, may push the oil market into a critical phase. A potential reopening of the Strait of Hormuz could initially lead to a bearish reaction but may ultimately support prices as inventory rebuilding occurs.
Gold's Position in the Market
Gold remains above USD 4,500, supported by lower oil prices that stabilize bond yields. However, gold's performance is currently tied to macroeconomic pressures, with elevated inverse correlations to crude oil and bond yields. For gold to regain momentum, easing inflation concerns are necessary.
Copper and Grains: Continued Support
Copper is trading near a one-week high, driven by demand linked to AI infrastructure and concerns over mine supply. Grains, particularly soybeans, are benefiting from weather concerns and rising costs, with renewed hopes for stronger Chinese demand.
Cocoa Market Dynamics
Cocoa has seen a dramatic price collapse of around 70%, but lower prices are making it financially viable for producers to increase cocoa content in products. This shift may reverse previous demand destruction caused by high prices.
Outlook
The broader commodity outlook remains heavily influenced by oil, which is shaping market sentiment and inflation expectations. Disruptions in shipping and energy markets are creating ripple effects across various commodities, particularly in fertilizer and agricultural markets.
As crude prices continue to dominate, they will likely remain a key driver across financial markets, influencing not only energy but also broader economic conditions.