Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Commodities weekly: Strong start to 2025 led by energy and metals
Ole Hansen
Head of Commodity Strategy
Key points in this update:
- The commodities sector is heading for a strong start to 2025, led by strong gains in energy and metals
- Given the level of global uncertainty its probably no surprise to see gold reach a one-month high
- Crude oil has rallied strongly amid exceptional strong winter demand and focus on sanctions
- Copper, platinum and silver all supported by the risk of tariffs uprooting normal trading dynamics
Ten days into 2025, the commodities sector has already sprung a few surprises. The Bloomberg Commodity Index, which tracks 24 major commodities, has rallied by more than 3% despite multiple headwinds from dollar and yield strength to the risk of trade wars. Gains have been seen across all sectors except grains. While it is not entirely unexpected—given the level of global uncertainty—to see gold building on last year’s rally to reach a one-month high, it is notable that among the top performers are three other metals: silver, copper, and platinum, all metals depending on industrial as well as investor demand.
Also crude oil, a market that has been singled out to struggle in 2025 amid ample supply and China weakness has jumped out of the starting block. At the other end of the spectrum, agriculture commodities has softened amid a stronger dollar, while EU gas prices have tumbled 10%, despite a cold start to January and the cessation of supplies from Russia via Ukraine on 31 December.
Part of the explanation for these behaviours lies in year-end positioning. Leveraged traders had accumulated long positions in EU gas, anticipating higher prices following the biggest November and December stockpile reduction since 2017. Meanwhile, copper and platinum futures positions flipped to net short in the final week of 2024. The unwinding of these trades has supported the current market moves. However, to fully understand these counterintuitive shifts—especially in metals and energy, given concerns about trade wars leading to slower growth and demand—other supporting themes have emerged at the start of the year, some of which point to renewed interest for commodities from – among others - macro-economic and technical focused investors.
So while caution is warranted when interpreting market trends in the early weeks of a new trading year, a notable theme has emerged: despite the headwinds from dollar and Treasury yield strength, investors are turning to tangible assets to hedge against persistent inflation risks, mounting fiscal debt concerns, and the risk of tariffs uprooting normal trading dynamics.
Regarding the uprooting of normal trading dynamics, we focus on recent developments in US-traded futures markets, particularly for metals such as HG copper, silver, and platinum. In these markets, prices have risen to levels relative to spot prices that are not justified by the typical costs associated with funding and storage. The New York futures market, with its deep liquidity and round-the-clock trading, is frequently used by traders and banks to hedge physical market commitments through short selling.
However, Trump’s pledges to impose universal tariffs on all goods from all countries have raised concerns. Specifically, these tariffs could increase the cost of holding short positions for future delivery. If the required metals to cover a short futures position need to be imported, the additional tariff costs could make short selling significantly more expensive.
In addition, the offshore deliverable CNY currency traded near a critical level against the dollar, with a break higher potentially triggering accelerated weakness as it may signal willingness from the Chinese central bank to let the currency weaken to mitigate the negative impact of US tariffs on Chinese imports. Concerns about a potential slump have prompted buying of physical metals, including copper, from Chinese traders, pushing the SHFE copper premium over London to a one-year high of USD 73/ton.
HG copper futures, traded in New York, have risen strongly after once again finding support in the USD 4 area before pausing with some resistance emerging around the 200-day moving average. Meanwhile, prices in London have only managed a 4% gain, highlighting the current pull in New York from traders covering short positions, both commercial and speculative.
Crude oil rally amid strong winter demand and sanction focus
WTI and Brent crude oil prices have remained range-bound over the past two years, averaging USD 76.60 and USD 81 during this time, however, with most of the activity during the final quarter of 2024 concentrated near the lower end of that range. The 2025 outlook suggests a well-supplied market, driven by non-OPEC+ production growth of approximately 1.4 million barrels per day, outpacing global demand growth, which the IEA estimates at around 1.1 million barrels per day. This dynamic leaves little to no room for production increases from OPEC+, where several major producers face rising spare capacity after years of output restraint aimed at supporting prices.
Despite these supply and demand fundamentals, both WTI and Brent crude oil have started the year with solid gains, driven by increased winter demand, particularly in the US, which is witnessing an exceptionally cold January. This has lifted demand not only for diesel and heating fuels but also natural gas, up 7% this month on rising power demand towards heating. Additionally, US inventories at Cushing, the delivery hub for WTI futures, have dropped to an 11-year low, nearing the minimum operating level of 20 million barrels. This inventory drop has strengthened the backwardation structure, where prices for prompt delivery rise faster than those for future delivery.
This development has attracted investor demand due to the positive carry achieved when rolling from an expiring contract to a lower-priced one. At unchanged prices over three months, an investor holding and rolling WTI futures could achieve an annualised return of more than 10%, providing a significant tailwind for bullish positions while discouraging shorting the oil market at this stage.
Fundamental support at the beginning of 2025 has also come from the potential for the Trump administration to impose additional sanctions on Iran. Over the past four years, Iran has managed to increase production by 1.3 million barrels per day. In addition, the US Treasury on Friday announced more Russian sanctions that would target more than 180 tankers carrying Russian crude, as well as maritime insurance providers based in Russia. These developments may further increase demand for crude from Middle East producers, led by Saudi Arabia, the world’s top swing producer, who have demonstrated restraint in recent years to support stable and higher prices.
Overall, we forecast another range-bound year for crude oil, with Brent and WTI crude prices both expected to spend most of the time fluctuating between USD 65 and USD 85.
Precious metals supported by an increasingly polarised world
Gold and silver ended 2024 consolidating strong gains, with gold reaching multiple record highs before peaking in October. The demand for investment metals has been driven by an increasingly uncertain geopolitical landscape, as global tensions and economic shifts have led investors to seek safer assets. This trend shows no signs of abating in the near future.
Central banks have aggressively purchased gold to diversify away from the USD and USD-based assets such as bonds, indirectly supporting silver prices. Additionally, concerns about persistent inflation and mounting global debt, particularly in the United States, have prompted investors to hedge against economic instability by turning to precious metals. However, looking ahead to 2025, investors may need to exercise greater patience. A tug-of-war between rising yields, expectations of delayed rate cuts, and fluctuations in the dollar is likely to result in higher volatility compared to 2024.
Silver’s sustained industrial demand is expected to keep it in a supply deficit through 2025, a deficit that could be deepened by increased "paper" demand via exchange-traded funds. Silver’s dual role—serving both investment and industrial needs—positions it to potentially outperform gold in the coming year. As a result, we forecast a decline in the gold-to-silver ratio, currently around 88, toward 75, a level observed earlier in 2024. If this materialises and gold reaches our slightly adjusted forecast of USD 2,900 per ounce, silver could trade above USD 38 per ounce, both levels well above the cost of carry.
Recent commodity articles:
7 Jan 2025: COT Report: Managed money's year-end positioning in forex and commodities
20 Dec 2024: Silver's resurgence in 2024: A precious metal with an industrial edge
17 Dec 2024: Investors cash in: Gold and silver see year-end profit taking
17 Dec 2024: Podcast: A wild ride in 2025 awaits
16 Dec 2024: COT Report: Agriculture in demand; Traders lift bets against the euro
13 Dec 2024: Commodities weekly: The forward curve and impact on returns
10 Dec 2024: Brazil's coffee crisis pushes Arabica to all-time high
9 Dec 2024: COT Report: Speculators bought crude and gold: euro shorts reach 4-year peak
6 Dec 2024: Commodities weekly: Copper rises on China optimism; OPEC delay signals crude weakness
3 Dec 2024: COT: Mixed week in commodities as dollar buying continued
29 Nov 2024: Commodities take a breather after action-packed November
28 Nov 2024: Coffee surges to a 47-year high
28 Nov 2024: Choppy gold market turns to Santa for December support
27 Nov 2024: Podcast: Will gold enjoy a Santa rally for the eight year in a row?
25 Nov 2024: COT Report: USD long jumps; Mixed week in commodities
22 Nov 2024: Commodity weekly: Strongest performance since April
19 Nov 2024: Gold and silver rise on Russia-US tensions
18 Nov 2024: COT: Limited dollar demand despite strength; Acclerated metals selling
11 Nov 2024: COT: Speculators bought energy and grains, sold gold ahead of elections
8 Nov 2024: Commodity weekly: Mixed response to Trump 2.0
6 Nov 2024: Podcast: US election and the market reactions, including commodities
6 Nov 2024: Trump and Republican victories spark commodity decline
4 Nov 2024: COT: Speculators flock to dollars, exit commodities ahead of US election
1 Nov 2024: Commodity weekly: Some weakness seen ahead of critical week
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