Commodities weekly: Middle East tensions lift crude and precious metals

Energy: geopolitical risk premium returns

Energy markets were the week’s dominant driver as crude prices climbed to a six-month high amid rising Middle East tensions. Traders are increasingly worried about the risk that diplomatic efforts fail after Donald Trump warned Iran it has at most 15 days to reach a nuclear agreement.

The prospect of supply losses through the Strait of Hormuz, one of the world’s most critical oil transit chokepoints, has prompted significant hedging activity. Options markets reflect this shift in risk perception: more than 344,000 Brent call options traded on Thursday, some 90% above the three month daily average, with put volumes less than half that level, signalling strong demand for upside protection amid the risk of a binary outcome that could see prices slump by 5-7 dollars if a non-military solution while spiking well above USD 80 in a worst-case scenario. 

The current therefore represents a strengthening geopolitical risk premium rather than a sudden shift in fundamentals. Global supply remains adequate, and a limited disruption could likely be absorbed. However, the vulnerability of flows through the Strait — combined with the region’s importance to global exports — means markets must now consider the risk of prolonged disruption rather than a short-lived shock.

Natural gas was the notable laggard in the energy complex, settling back below USD 3 per MMBtu for the first time since October after spiking to near USD 8 per MMBtu just three weeks ago. The current weakness being driven by an ample supply outlook amid easing winter demand expectations. 

Precious metals: consolidation amid cross-currents

Gold continues to trade within a broad USD 4,860–5,140 range. Geopolitical tensions and central bank demand provide underlying support, but firmer yields, a stronger dollar, and Fed caution have limited upside momentum. However, gold’s relative but still dramatic correction during the recent slump underscores the metal’s ability to hold support despite dollar strength amid ongoing investor demand for portfolio hedges.

Silver outperformed gold on the week but remains technically constrained with a sustained move above USD 86 is required to attract fresh momentum and confirm a renewed uptrend. Until then, price action may remain volatile, reflecting its dual role as both a monetary and industrial metal. In the coming week, the gap between registered COMEX stocks which is eligible for delivery and open interest in SIH6, which enters its month-long delivery period on 27 February, narrowed to 151 million ounces as of Thursday, down 25% over the past week. The March–May roll spread has seen steady albeit small increase in the contango to around 61cents - March lagging the performance of May - signaling no roll stress at this stage.

That said, social media is awash with claims that COMEX/CME could see demand exceeding available supply. In reality, the exchange has several mechanisms to maintain orderly settlement, but the debate underscores the ongoing tension between “paper” and physical silver at a time when immediately deliverable supply remains tight.

Industrial metals: Lunar new year lull masks underlying tensions

Industrial metals traded quietly as the Lunar New Year holiday reduced participation across Asia, particularly in China — the world’s largest consumer of base metals. This seasonal lull highlights how heavily recent price strength depended on Chinese demand.

Copper drifted lower and remains under pressure from elevated exchange inventories – rising to a fresh 23-year high at 1.05 million tons - and long liquidation. However, the long-term outlook tied to electrification, grid expansion and the energy transition remains supportive. Market focus will shift to post-holiday Chinese demand signals and inventory trends to assess near-term direction.

Iron ore futures in Singapore slumped to near USD 95 per ton after a six-week losing streak pushed prices to a seven-month low. The decline reflects signs of a loosening market as Chinese port inventories rise, the steel market shows seasonal softening, and major miners increase output.

Soft commodities: cocoa collapse deepens

Soft commodities were dominated by cocoa’s continued collapse — a textbook example of the adage that high prices ultimately sow the seeds of their own decline.

New York cocoa futures fell to around USD 3,000 per ton, down more than 50% this year. Elevated prices curtailed demand through shrinkflation and substitution, while higher farmgate prices incentivised increased production.

Buyers in Ivory Coast and Ghana stepped back after international prices fell below government-guaranteed farmer levels. In response, Ghana cut its farmgate price by nearly 30% last week to around USD 2,700 per ton, with Ivory Coast considering similar adjustments. Coffee prices also weakened, while sugar posted modest gains.

Widening divergence between wheat prices in Chicago and Paris

Wheat markets are showing a widening transatlantic divide. Chicago (CBOT) futures have rallied above USD 5.60 per bushel for the first time since last July, moving away from multi‑year lows near USD 5, while Paris milling wheat remains anchored near its six‑month average around EUR 190 per ton.

The recovery in Chicago — with gains in seven of the past eight weeks — reflects mounting domestic supply concerns. Sub‑zero temperatures across the U.S. Plains have increased winterkill risk where limited snow cover left crops exposed, compounding drought stress affecting roughly half of winter wheat areas. Early USDA outlook projections pointing to lower 2026 production have also triggered short covering by funds that held extended net‑short positions, adding technical momentum to the rally.

European prices have not shared this strength. Paris wheat remains pressured by aggressive Black Sea competition, with Russian exporters lowering offer prices to defend market share. A relatively firm euro and reduced access to key destinations have further constrained export competitiveness, while diplomatic tensions between France and Algeria have prompted a key former buyer of French wheat to increasingly source supplies from the Black Sea region.

While U.S. prices are responding to forward supply risks, the European market remains focused on near‑term oversupply and abundant competitively priced wheat from Russia and the Southern Hemisphere.

Outlook: geopolitics, dollar positioning and China demand in focus

Looking ahead, three themes are likely to dominate commodity markets in the coming week(s):

Geopolitical risk: Escalation risks in the Middle East may continue to underpin a risk premium in crude and refined products. The binary nature of potential outcomes could temper outright positioning, with hedgers favouring options structures while freight rates and insurance costs serve as early indicators of disruption.

Macro and dollar dynamics: Crowded bearish dollar positioning raises the risk of sharp counter‑trend rallies, particularly if US economic data surprise to the upside. Recent releases still point to a growing economy with moderating inflation and a resilient labour market, partly offset by softer real consumer demand.

China’s return from holiday: Industrial metals demand signals following the Lunar New Year break will be critical for near‑term price direction. Market participants will also monitor precious metals to assess whether January’s surge in speculative interest - especially in silver - re‑emerges, potentially increasing volatility.

Despite periodic volatility, the broader commodity complex continues to benefit from structural supply constraints, resilient demand and geopolitical uncertainty — factors that support the case for maintaining broad exposure to commodities and commodity‑linked equities within a diversified portfolio.