Commodities weekly: war, weather and backwardation drive returns

Energy dominates through disruption and positive carry

Excluding natural gas, the Bloomberg Energy Total Return Index has gained around 54% year to date. Brent and WTI crude oil are both up around 65%, while refined products have delivered even stronger returns. European gasoil has risen by more than 130% this year, while US ultra-low-sulphur diesel has gained 124%. Gasoline has also performed strongly, reflecting low inventories, refinery disruptions and the impact of higher crude and freight costs.

Natural gas remains the major exception, on a total return basis falling almost 20% year to date and more than 41% during the past year. Ample domestic supply, storage levels above the seasonal norm and periods of reduced LNG export capacity have continued to weigh on the US market.

Curve structure has played an important role in the divergence between spot and total returns. Crude oil and refined fuel curves are strongly backwardated, meaning near-dated futures trade at a premium to deferred contracts. Investors rolling long positions from an expiring contract into a cheaper deferred contract receive a positive roll yield. The 12-month implied carry is around 10% for Brent and WTI, while it exceeds 20% across several refined products. This positive carry has provided a substantial tailwind to passive long investors, helping total returns significantly outperform movements in prompt futures prices.

Natural gas, by contrast, continues to trade in contango. This means investors generally sell an expiring contract and replace it with a more expensive deferred contract, creating a negative roll yield even when prompt prices are broadly unchanged.

Agriculture faces war, weather and biofuel risks

Agriculture has gained 11.4% year to date, with the grain and soybean complex up 11%. The sector has also been one of July's strongest performers, rising 8% as geopolitical and weather risks have returned to focus.

Wheat has led the latest advance with the Paris, Chicago and Kansas wheat futures contracts all rising by around 14% or more, supported by renewed attacks on Black Sea shipping infrastructure, tightening exportable supplies and concerns about crop conditions in parts of Europe. The situation differs from 2022, when the escalation of the war occurred ahead of the Northern Hemisphere growing season and raised fears of both lost production and disrupted exports. The current risk is primarily focused on logistics and the availability of export supplies. Nevertheless, prolonged disruption could keep a geopolitical premium embedded in wheat prices.

A strengthening El Niño may add another layer of volatility during the second half. Its impact is unlikely to be uniform: some producing regions may suffer from heat, drought or excessive rainfall, while others could benefit from improved growing conditions. The likely outcome is therefore greater regional dispersion and higher volatility, rather than an automatic rise in the overall level of food prices.

Energy prices also matter through the biofuel channel. Corn, soybean oil and sugar are increasingly linked to gasoline and diesel economics through ethanol and renewable diesel production. A prolonged period of elevated fuel prices could therefore strengthen demand for selected agricultural feedstocks.

Precious metals search for a new direction

Precious metals remain one of the weakest sectors in 2026, with the Bloomberg Precious Metals Index down 9.5% year to date. Gold has declined 8.2%, while silver, platinum and palladium have fallen by more than 20%. The year-to-date weakness follows strong gains during the previous year. Gold remains 18% higher over the past 12 months, while silver has gained more than 44%, highlighting the scale of the earlier rally and the subsequent correction.

Gold and silver are now struggling to establish a clear direction as investors weigh competing macroeconomic forces. Softer US CPI and PPI readings recently supported prices by reducing expectations for near-term Federal Reserve tightening. However, the move quickly faded after renewed gains in oil and fresh US strikes against Iran revived concerns that higher energy costs could feed back into inflation.

Rising oil prices traditionally create headwinds for precious metals by lifting inflation expectations, supporting Treasury yields and potentially strengthening the dollar. This increases the opportunity cost of holding assets that offer no interest income. At the same time, a prolonged energy shock could weaken global growth, worsen fiscal pressures and revive concerns about debt sustainability and currency debasement. These developments would ultimately be more supportive for gold. The market's inability to choose between these narratives helps explain the recent lack of direction.

Trend signals remain constructive but fragmented

Longer-term trend signals remain broadly supportive across energy, industrial metals, grains and livestock. Using the relationship between the 50-day and 200-day moving averages, more than half of the commodities tracked continue to trade with a positive long-term trend. The strongest signals remain concentrated in refined fuels, selected industrial metals, wheat, soybean products and livestock. Precious metals, meanwhile, continue to trade below their longer-term trend indicators following the sharp correction earlier this year.

The short-term picture is less convincing. The relationship between the 10-day and 100-day moving averages is now broadly divided between positive and negative signals. Weakness in crude oil following the recent slump ahead of the latest rebound, and precious metals has been offset by improving momentum across grains, coffee, cocoa and selected livestock contracts. 

This divergence suggests the commodity sector is entering the second half with no single theme likely to dominate every market. Geopolitical developments, weather conditions, monetary policy and curve structure will remain important, but their impact will vary considerably between sectors.

The broad commodity rally may therefore continue, but performance is likely to remain selective. In such an environment, understanding physical market tightness, term structure and regional supply risks will be just as important as forecasting the direction of spot prices.