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Commodity Outlook: A bumpy road ahead calls for diversification
Ole Hansen
Head of Commodity Strategy
Key points
- Gold supported by an increasingly polarised world, with tight supply favouring silver
- Industrial metals: base- over ferrous- metals on demand shift from construction to electrification
- Crude oil fundamentals point to lower prices, but extended range bound trading remains our base case
- Natural gas a potential winner amid a global demand surge for power
The commodities sector managed a small yet respectable gain in 2024, with the Bloomberg Commodity Total Return index ending up 5.4%. The year began on a firm footing, with the market focusing on the potential positive growth impacts of China’s stimulus and incoming US rate cuts. However, strong headwinds for commodities developed, including continued strength in US economic data, combined with signs of sticky inflation, and lowered expectations for future US rate cuts that sent the USD and US Treasury yields sharply higher.
The return of the Trump administration further raised concerns about inflation and fiscal stability, given the focus on tariffs, unfunded stimulus, and immigration. These developments saw safe haven precious metals riding high, with the sector returning 25%, while soft commodities experienced an even stronger year amid challenging weather conditions reducing production levels in key growing regions for cocoa and coffee. Economic growth and demand-dependent sectors, such as energy and industrial metals, delivered small gains, while grains suffered a double-digit setback on another bumper crop year of ample supply.
Heading into 2025, there is little doubt we face a year where multiple developments and uncertainties may create a challenging trading and investment environment for commodities. Will the Trump team open with a tariff broadside that triggers countermeasures and an immediate all-out trade war, or as we discuss in our Q1-25 macro introduction, will Trump open with modest tariffs and an invitation for deal-making? Besides tariffs, the market will await China’s response, which could lead to stronger domestic demand for raw materials, most likely supporting those benefiting from the electrification process over those used in construction. Furthermore, the dollar and its negative correlation to commodities, the direction of US short-term rates, and yields will also be in focus.
Overall, these developments could pressure growth-exposed crude oil and some industrial metals with relatively comfortable supply and demand balances, while still supporting those commodities with a tightening supply outlook, including soft commodities such as coffee, cocoa and potentially also sugar, metals such as copper, aluminum and silver needed for the energy transition, and not least gold given its continued ability to attract demand from less rate- and dollar-sensitive investors. Overall, we generally anticipate developments that will continue to attract demand from investors seeking diversification and a hedge against sticky inflation, potentially seeing the Bloomberg Commodity Index repeat last year’s performance, with the risk/reward skewed to the upside if tariffs are more targeted rather than broad-based and the US dollar eventually rolls over to the weak side , which would boost the economic growth outlook.
Gold supported by an increasingly polarised world, with tight supply favouring silver
Gold and silver spent the final quarter of 2024 consolidating strong gains and after gold peaked in October after achieving multiple record highs. The demand for investment metals has been fuelled by an increasingly uncertain geopolitical landscape, where global tensions and economic shifts have led investors to seek safer assets, a development that shows no signs of fading anytime soon.
Central banks have been buying gold aggressively to diversify away from the USD and USD-based assets such as bonds, and this activity has indirectly supported silver prices. Additionally, concerns about mounting global debt, particularly in the United States, have prompted investors to hedge against economic instability by turning to precious metals. In the year ahead, however, investors may need to exhibit a greater deal of patience as the tug-of-war between rising yields and fading rate cuts, as well as the swings and roundabouts of the dollar, will trigger more volatility than seen in 2024.
While investment-driven factors will continue to play an important supportive role for silver, its price dynamics are also closely tied to its industrial uses, from which it derives around 55% of its total demand. In 2024, increased industrial demand has helped create physical tightness in the silver market. Sectors such as electronics and renewable energy, particularly photovoltaic (solar) technologies, have significantly contributed to this surge. The expectation of sustained industrial demand is likely to keep silver in a supply deficit into 2025, potentially deepened by a pick-up in ‘paper’ demand through exchange-traded funds. This dual role—balancing both investment and industrial demand—could enable silver to outperform gold in the coming year.
We forecast a potential decline in the gold-to-silver ratio, which currently hovers around 88, possibly moving toward 75, a level seen earlier in 2024. If this occurs, and with gold reaching our slightly lowered forecast of USD 2,900 per ounce, silver might trade above USD 38 per ounce, both well above the cost of carry.
Industrial metals: base over ferrous on demand shift from construction to electrification
Among the industrial metals, we maintain our bullish long-term view on metals that support the energy transition, not least copper and aluminium, fuelled by investments in the power grid, along with a rapid growth in renewable energy installations from EVs to solar and wind turbines. On the other hand, we see limited upside for those depending on demand from the construction sector, such as iron ore and steel, which may continue to be weighed down by increasingly comfortable supply and demand balances, as China’s building boom has stalled.
Copper, the king of green metals, spent the remainder of 2024 consolidating ahead of key support with Trump tariffs and dollar strength, and patchy demand in China, where grid- and EV-related applications nevertheless completely offset weakness in housing. As the electrification of the world continues to gather momentum, the demand for power and the ability to transmit power will continue to rise, thereby supporting demand for copper and aluminium. Together with a limited funnel of new mining projects, this will over time support tighter conditions and higher prices.
In the short term, however, investors probably need to be patient while the impact of Trump’s tariffs and countermeasures is being evaluated. With this relatively cautious approach, we see copper rallying towards USD 4.8, well above the one-year forward price as of early January.
Softening crude oil fundamentals point to lower prices, but range bound trading remains our base case
Crude oil prices have been range-bound for the past two years, and while most of the activity during the final quarter of 2024 was concentrated near the lower end of that range, the short-term outlook points to more of the same in the months ahead. Supply growth from non-OPEC+ producers, around 1.4 million barrels per day, looks set to rise faster than global demand in 2025, estimated by the IEA at around 1.1 million barrels per day, leaving little or no room for an increase from OPEC+, where several major producers have been left with rising spare capacity after years of restraint to support prices.
However, slowing demand growth in China, the world’s top importer, as well as rising non-OPEC+ production will likely weigh on prices, thereby limiting any upside potential from increased sanctions against Russia, Iran, and Venezuela that constrain production. In Brent, range-bound and averaging USD 76.75 in the past two years, we forecast a 2025 range between USD 65 and USD 85.
Natural gas a potential winner amid global power demand surge
US natural gas prices are expected to increase in the coming year as demand for power continues to accelerate, not only in the US but around the world. This is especially true in China, where power demand growth has outpaced GDP growth over the past two years, leading to a rapidly expanding natural gas power capacity. Additionally, natural gas is increasingly seen as a bridge between traditional fuels like coal and renewables. However, as renewable energy production is volatile due to the dependency on weather conditions, natural gas-powered capacity is set to grow.
US Henry Hub prices, which have been cheap for several years, both on an absolute basis and also compared with prices in Europe and Asia, amid rising production and stable demand, are expected to rise to reflect changing fundamentals. Rising LNG exports, especially to Europe, and increasing domestic demand for power are unlikely to be met by a similar increase in production. After spending most of 2024 trading below USD 2.50 and averaging USD 2.40 for the year, we anticipate stronger price action in 2025, supporting an average price closer to USD 3.50. However, it is worth noting that the forward curve structure makes it very difficult to capture such gains through futures and futures-tracking ETFs. Last year, the prompt futures price gained 44%, but the curve structure resulted in a total return loss of 26%. In other words, a bullish view on natural gas prices is best captured through investments in natural gas-related companies benefitting from higher prices, not the commodity itself.