Commodities weekly: Oil’s grip on macro and markets remain firm

Oil remains the market's macro thermostat

Brent crude fell from above USD 112 on Monday towards USD 102 on Thursday as renewed hopes for a US-Iran agreement briefly encouraged traders to price a higher probability of additional supply returning to the market. By Friday, prices had rebounded towards USD 105 after comments from Iran’s Supreme Leader regarding Tehran’s uranium stockpile, alongside disputes surrounding toll arrangements through the Strait of Hormuz, complicated the prospects for a near-term breakthrough.

Oil has effectively become the market's macro thermostat, driving inflation expectations and influencing bond yields, currencies and broader risk appetite. The midweek bond sell-off highlighted this relationship clearly. While Fed rate expectations turned to hikes instead of cuts, thirty-year US Treasury yields climbed to their highest level in almost two decades as investors demanded greater compensation for holding longer-dated debt amid war-driven energy inflation and concerns over widening budget deficits.

Meanwhile, incoming economic data increasingly suggests the global economy is entering a more difficult phase characterised by slowing growth and rising inflation pressures.

PMIs from Australia to Europe pointed to deteriorating conditions across both manufacturing and service sectors during May. Manufacturing activity either slowed or contracted across many regions, although the United States stood out as an exception where firms accelerated production and front-loaded orders amid concerns about future shortages and rising costs.

Taken together, the developments increasingly resemble the classic symptoms of a supply-driven economic shock: slowing activity occurring simultaneously with rising costs. 

Why are oil prices not trading even higher?

Considering the magnitude of disruptions associated with the Strait of Hormuz, many investors continue to ask why oil prices are not significantly higher.

Several mitigating factors continue to soften the immediate impact. These include strategic reserve releases, rerouted exports through pipelines from Saudi Arabia and the UAE, rising US exports of crude and refined products, and China temporarily reducing imports while drawing on domestic reserves. In addition, and increasingly important, high prices have begun to trigger demand destruction through lower refinery intake, government measures aimed at reducing consumption and shifts in consumer behaviour.

Together with the market’s continued belief in an eventual diplomatic solution, these factors have helped cap prices. However, the onset of peak summer fuel demand, combined with ongoing disruptions and depleted global stockpiles, could according to the IEA push the oil market into the "red zone" during July and August.

Meanwhile, a reopening of the Strait could initially trigger a bearish reaction as stranded cargoes begin moving simultaneously, releasing large volumes of crude and refined products into the market. However, that relief may prove temporary given the need to rebuild commercial inventories, strategic reserves and supply chains that have been heavily depleted during the crisis. Once trade normalisation begins, inventory rebuilding could create renewed price support as buyers compete for barrels needed to restore stock levels. In other words, reopening Hormuz may not end market stress; it may simply shift it into a different phase, potentially lifting the pre-war Brent price floor by USD 10–15 and supporting revenues and investment across the energy sector.

Gold waits for macro pressure to ease

Gold continues to hold above USD 4,500 after recovering earlier this week when lower oil prices helped stabilize bond yields and reduce fears of further monetary tightening.

Longer-term structural support factors remain largely intact. Fiscal debt concerns continue to grow, reserve diversification trends remain active, de-dollarisation efforts continue and central bank demand is likely to return once energy market stress eventually eases.

However, markets currently remain focused on near-term macro forces. Gold and hard assets generally are showing unusually elevated inverse correlations with crude oil, bond yields and the dollar, highlighting the reaction function currently driving prices.

Higher crude prices feed inflation expectations and increase fears of additional rate hikes. Rising yields raise the opportunity cost of holding non-yielding assets, while a stronger dollar reduces gold’s attractiveness for non-US investors.  For gold and other investment metals to regain upside momentum, the market needs to see some easing in oil-driven inflation concerns, or renewed evidence that growth risks are beginning to outweigh inflation fears.

Copper and grains continue to find support

Copper trades near a one-week high, supported by improving risk sentiment and hopes for a reduction in geopolitical tensions.

Demand growth linked to AI infrastructure, electrification, cooling demand, grid expansion and strategic stockpiling continues to strengthen. At the same time, concerns persist that mine supply will struggle to keep pace. Adding to these concerns, Codelco, the world's largest copper producer, was found to have overstated its December production figures, implying that last year's output fell to its lowest level since 1998.

Aluminium strength similarly reflects ongoing concerns surrounding energy costs and physical supply tightness, driven in part by continued supply disruptions from the Persian Gulf, a region that has become a major producer thanks to access to cheap energy and now accounts for around 9% of global primary aluminium production.

Within agriculture, grains and soybeans remain the main drivers behind this year's 11% gain, supported by weather concerns, surging diesel and fertilizer costs that are raising concerns about production levels, and more recently renewed hopes for stronger Chinese demand. In soft commodities, some of this year's biggest losers include cocoa and coffee, partly offset by strength in cotton and sugar, both of which have also benefited from higher energy prices due to their links to synthetic fibres and ethanol.

Cocoa: Real chocolate stages a comeback

Cocoa continues to rank among this year’s weakest performers - down around 41% - following one of the most dramatic boom-and-bust cycles seen across agricultural markets. After prices surged to unprecedented levels last year, chocolate producers responded in a predictable way: bars became smaller, recipes became more creative, and consumers increasingly discovered that "chocolate-flavoured" was not always quite the same thing as chocolate.

Now the economics appear to be shifting once again.

Following a collapse of around 70% from its peak, lower cocoa prices are beginning to make it financially attractive for producers to increase cocoa content after spending much of the past year substituting expensive ingredients with cheaper alternatives.

Commodity markets often demonstrate that the cure for high prices is high prices, and cocoa may now be offering one of the more enjoyable examples of that rule in practice. Extreme prices initially forced demand destruction and product reformulation, but lower prices may now gradually reverse that process.

Outlook

While this week saw some consolidation following strong gains earlier this year, the broader commodity outlook remains heavily influenced by the same dominant factor: oil, given its signalling role not only for tight energy markets but also for the disruption to shipments through the Strait, which continues to create price pressures across products and industries.

Markets may continue jumping from one headline to the next, but until there is tangible evidence of a durable reopening of the Strait of Hormuz and easing inflation pressures, oil is likely to remain not only the commodity market’s main driver, but also a dominant force across broader financial markets.

Its influence now extends well beyond energy itself, with a growing number of commodities increasingly exposed to second-round effects from disruptions to shipping and energy-intensive supply chains. Fertilizer markets are particularly vulnerable given their dependence on natural gas and ammonia flows, with higher costs potentially feeding through into crop prices and food inflation. Aluminium production, one of the most electricity-intensive industrial processes, also faces renewed cost pressure, while cotton and biofuel-linked crops such as corn, soybeans and sugar can experience knock-on effects through higher transport costs and shifting demand dynamics between food and fuel markets.

One of the less visible but potentially important transmission channels is sulphuric acid, one of the hidden workhorses of industrial civilisation. It sits upstream of large parts of the modern economy through its use in fertilizer production, copper processing, uranium leaching, nickel refining, phosphate conversion and numerous chemical processes. Any sustained disruption to energy markets or shipping routes can therefore create ripple effects that extend far beyond crude itself.

More than any other asset currently, crude prices are shaping market sentiment through their impact on inflation expectations, central bank policy expectations, sovereign bond yields and the US dollar. In the current environment, oil has effectively become the market’s primary transmission mechanism for macro risk.