Commodities slide as markets price a tentative path to peace

The reaction has been most visible in energy markets. Brent crude oil fell below USD 86 per barrel, a three-month low after President Trump once again signalled that negotiations were progressing towards a potential agreement. Unlike previous announcements that were met with considerable scepticism, markets this time appear increasingly willing to price in a meaningful probability of success.

Part of that optimism reflects developments on the ground. While still far from normal, flows of crude oil, refined products and natural gas through the Strait of Hormuz have shown tentative signs of improvement in the past week. At the same time, traders are increasingly focused on the prospect of a surge in exports from tankers currently stranded inside the Gulf and those waiting outside to pick up cargoes once shipping conditions improve further, potentially creating a temporary period where the market experiences a supply disruption in reverse. However, given the decline in Brent crude already seen and the fact that we have entered the peak seasonal demand period, the scope in our opinion for significantly lower prices beyond the initial wave of delayed crude and product shipments appears limited.

The continued use of pipeline rerouting by Saudi Arabia and UAE means that flows through the strait may not need to return to pre-war levels to normalize overall Middle East flows, but much now hinges on the ability to restart 10,000 wells and how quickly storage facilities can be reduced in order to receive fresh production. The 2027 average Brent crude price trades around USD 78, some 18% above the pre-war level highlighting a market that is pricing in a higher for longer scenario amid additional demand towards the rebuilding of commercial and strategic stockpiles, with the offsetting factor being the level of long-term demand destruction due to higher prices. For now, traders appear focused on the immediate implications of a reopening rather than the longer-term challenges that remain.

The resulting decline in energy prices has reverberated across commodity markets. The Bloomberg Commodity Index is down around 5% so far this month, reducing its year-to-date gain to around 19%. The weakness has been remarkably broad-based, with copper and cattle being the only exceptions out of 26 major futures contracts trading in the black this month.

Lower crude oil prices have spilled into several agricultural markets through their links to biofuel, ethanol and synthetic-fibre demand. Soybean oil, corn, sugar and cotton have all experienced renewed selling pressure as the economics supporting alternative fuel production have weakened alongside energy markets.

The latest wave of liquidation across metals has also been notable for its breadth. Rather than reflecting commodity-specific developments, recent price action increasingly resembles a macro-driven adjustment across the sector triggering an increased amount of technical short selling. Rising inflation expectations following the Middle East conflict, supporting higher bond yields, a stronger dollar and growing speculation that the Federal Reserve may need to maintain a restrictive monetary stance for longer have collectively created a challenging backdrop for commodities. As a result, investors have reduced exposure across several sectors simultaneously.

The precious metals complex has been particularly hard hit.

Despite recovering amid the latest Middle East peace attempt, the Bloomberg Commodity precious metals index has fallen around 8% this month and is down around 2% for the year. The selloff has been led by silver and platinum, which tend to be more volatile than gold due to their smaller and less liquid markets.

Gold fell to a seven-month low this week near USD 4,000 after recently breaking below its 200-day moving average - last around USD 4,450 - triggering technical selling and long liquidation, resulting in gold retracing 38.2% of its 2022–2026 rally. The sharp correction driven by technical momentum selling and recently also forced long liquidation has triggered a broad reset in investor sentiment, reflected in lower futures open interest, ETF outflows and softer physical demand.

As mentioned, gold and most other metals rebounded following Trump's latest announcement on Iran as short sellers reduced exposure. The rally reflects hopes that a successful agreement could help ease inflation pressures through lower energy prices, thereby reducing pressure on bond yields and allowing investors to refocus on longer-term supportive themes such as fiscal debt concerns, central-bank diversification away from the dollar and ongoing geopolitical fragmentation.

However, markets will likely need a signed agreement and clear evidence of improving energy flows before confidence fully returns. Until then, sentiment is likely to remain fragile while gold trades below its 200-day moving average, currently around USD 4,450.

Industrial metals have proven more resilient.

The Bloomberg industrial metals sector is down around 2% this month but still holds gains of nearly 13% for the year. Copper remains the standout performer despite the recent correction.

COMEX high-grade copper continues to trade close to unchanged on the month after successfully defending key support near USD 6.15 per pound. The market also maintains a premium over London Metal Exchange prices as traders await the outcome of the U.S. administration's review of potential copper tariffs, due by the end of June.

While copper has not escaped broader risk reduction, its structural outlook remains supportive. Demand linked to electrification, power-grid investment, artificial intelligence infrastructure and defence spending continues to underpin the longer-term narrative, helping the market absorb periodic bouts of macro-driven weakness.

Looking further ahead, another potentially significant risk factor has emerged.

The Japan Meteorological Agency has formally declared the return of El Niño conditions in the equatorial Pacific, marking the first event since 2023. Some forecasters are already discussing the possibility of a particularly strong episode, with a 63% chance it could evolve into a "Super El Niño" heading into 2027, raising concerns about another period of weather-related disruptions across global commodity markets.

El Niño arrives at an especially sensitive moment. The global economy is still adjusting to the inflationary consequences of the Iran conflict, while supply chains remain vulnerable following months of disruption. Historically, El Niño has been associated with drought conditions across parts of Australia, Southeast Asia and southern Africa, regions critical for grain, sugar and other agricultural production. At the same time, heavier rainfall in parts of South America can disrupt transportation networks and potentially affect mining operations, including copper production in Chile and Peru.

Beyond agriculture and mining, elevated temperatures often increase electricity demand and place additional strain on power systems, creating knock-on effects for natural gas, coal and power markets. Stronger cooling demand, particularly across Asia, could lift gas consumption for power generation and provide support to global LNG prices as European and Asian buyers compete for available cargoes. This comes at a time when Qatar, one of the world's largest LNG exporters, may struggle to return to full export capacity for many months after damage to export facilities during the early stages of the conflict, potentially limiting supply flexibility during periods of peak demand.

At this stage, the impact remains largely a risk premium rather than a realized supply shock. However, after spending much of the year focused on geopolitics and energy security, commodity markets may soon find themselves having to contend with another familiar challenge: the weather.

For now, however, the dominant theme remains the ebb and flow of diplomacy between Washington and Tehran. Markets are increasingly willing to believe that a path towards normalization exists, but belief alone will not fully remove the war premium. Until an agreement is signed and reflected in physical energy flows, commodities are likely to remain highly sensitive to every headline emerging from both capitals.