Commodities weekly: Strength in energy and grains offsets pause in precious metals

Commodities in focus as Middle East tensions escalate

Crude oil prices have seen a $10 per barrel risk premium priced in, driven by concerns over potential supply disruptions through the Strait of Hormuz—a vital corridor for global oil flows. Refined products, especially diesel, have surged even more amid mounting geopolitical tension and the mentioned supply concerns into a seasonal peak demand period.

Besides energy, the war premium has also extended to agriculture markets, where grains—particularly soybeans, corn, and wheat—have caught a bid. Soybeans and corn due to their biofuel link, which rises in tandem with diesel and gasoline prices. Wheat, a dietary staple across the Middle East and North Africa, has gained on fears of regional supply disruptions and food security concerns. Sugar, another food commodity that is linked with crude oil prices due to Brazil’s ability to shift production from sugar to fuel ethanol did not respond to the increases seen so far, not least because of the prospect of a strong production outlook in Brazil, India, and Thailand.

Industrial metals have also started to respond. Aluminium may find additional support should energy prices remain elevated, given its energy-intensive production process. The Middle East, a key producer and exporter of aluminium to Western markets, could see disruptions that tighten supply further. A prolonged period of higher energy prices will inadvertently put upward pressure on the general cost of mining and refining, partly offset by an already soft global macroeconomic outlook amid Trump's tariff war, which may soften further from rising input costs, supporting a sticky to higher inflation outlook.

Silver and platinum hit fresh cycle highs before retreating with tired-looking gold.

In precious metals, gold, silver, and platinum retreated this week as traders booked profits following the Fed’s latest FOMC meeting. The central bank signaled a cautious stance, with no immediate plans to cut rates as tariff-related inflation risks come into focus. Gold is on track for its first weekly loss this month, having shown signs of exhaustion near recent highs. While a short-term correction cannot be ruled out, the broader bullish backdrop—driven by geopolitical uncertainty, central bank demand, and a weakening macroeconomic outlook—remains intact.

Silver, which hit a 13-year high above $37 earlier in the week, also succumbed to profit-taking, and to avoid a deeper pullback, it will need to hold support near the $35 level. Platinum, up 45% year-to-date, stalled just below the 2021 high at $1,340—a key resistance level that must be cleared to confirm a longer-term breakout after years of rangebound trading.

Crude's risk premium ebb and flows with focus on Washington

With Iran vowing to respond with missiles and drone attacks and rising fears of US involvement in strikes on Tehran and its underground nuclear facilities, the escalation has once again raised fears of broader conflict in a region responsible for a third of global oil output. Tensions around the Strait of Hormuz—through which over 20 million barrels of oil transit daily—are the main focus. Pricing a market that on balance—without a disruption—should trade closer to or below USD 70 is difficult.

In the coming days, the market will remain laser-focused on developments in and around the Strait of Hormuz, as well as signals from Washington, after President Trump indicated a decision on whether to strike Iran could come within two weeks. While the geopolitical risk premium has supported crude prices recently, it’s worth noting that on days without fresh escalation, this premium tends to deflate—allowing prices to drift back toward fundamentally justified levels, currently seen near or just below USD 70 per barrel.

In the event of a short-lived disruption, however unlikely, prices could spike sharply towards USD 100 before easing amid the release of strategic reserves—primarily from China and the U.S.—along with logistical rerouting of Middle East exports through key pipeline infrastructure. The most significant of these is Saudi Arabia’s East-West pipeline, capable of moving up to 5 million barrels per day to the Red Sea, and the UAE’s Fujairah terminal, which can handle around 1.5 million barrels per day, bypassing the Strait entirely. Another option is the reopening of Iraq’s Kirkuk-Ceyhan 0.65 million barrels per day capacity pipeline, which has been closed since March 2023 due to a payment dispute between Ankara, Baghdad and Erbil.

Short covering lifts grains, but soft fundamentals remain a drag

Wheat futures in Chicago surged to a two-month high this week, driven by adverse weather across key growing regions in the U.S., Europe, and Russia, alongside signs of robust export demand—particularly into North Africa. The rally which potentially received some extra strength related to the Middle East conflict has been amplified by hedge funds reducing long-held short positions in both CBOT and Kansas HRW contracts.

Despite wet weather harvest delays in the U.S., early crop quality and yields have exceeded expectations, after the USDA this week lifted its spring wheat condition rating to 57% good or excellent, up from 53%, suggesting no immediate threat to overall production. Additional price strength from current levels could trigger upside breaks adding further momentum to the rally, not necessarily due to price-friendly fundamentals, but first of all due to buying as wrong-footed longs scale back bearish bets. For the rally to become more sustainable, thereby signalling a low in the market following three years of weakness, the global production outlook needs to deteriorate further, so for now we view the rally as technically more than fundamentally driven.