Commodities stabilise supported by fuel and weather risks

Middle East flare-up tests the ceasefire

Energy markets were again forced to confront geopolitical risk after a fresh flare-up in fighting between the US and Iran once again raised fears that the ceasefire was breaking down. Brent crude rallied sharply from support in the low USD 70's to near USD 80 as traders reacted to renewed attacks and comments from President Trump that initially appeared to cast doubt on the durability of the agreement.

However, the rally has so far lacked the conviction normally associated with a market preparing for a prolonged and severe supply disruption, instead pointing towards a bid being underpinned by wrong-footed short sellers after recent COT data showed a near record gross short position in Brent crude futures. Prices softened ahead of the weekend as Washington reiterated its commitment to finding a negotiated solution and technical-level talks with Iran continued despite the renewed hostilities. For now, traders appear to view the latest confrontation as a serious test of the ceasefire rather than its definitive collapse. Key to watch is the traffic through the Strait of Hormuz which this week slowed down with just a few large commodity-laden vessels being seen transiting the key waterway.

In its latest monthly update, the IEA warned that the recent flare-up puts the rebuilding of oil inventories at risk, especially at a time when the recovery in global oil demand is underway. Overall, the agency forecasts that global oil demand will fall by 1 million barrels per day in 2026 before rising by 1.9 million barrels per day the following year. One particularly notable observation concerned the UAE, which the IEA said managed to boost production to an all-time high of 4.1 million barrels per day last month, using its own ships to transport barrels out of the Persian Gulf. This recovery may inadvertently raise speculation about increased competition among Gulf producers, potentially keeping prices subdued once normality eventually returns to the region.

Diesel sounds a louder alarm than crude

While crude oil has struggled to sustain its geopolitical premium, refined fuels are telling a more concerning story with prices holding firm or in some cases rising while crude was falling, thereby leaving a windfall for refineries as margins surge higher. In the past week, diesel has been among the strongest-performing commodities, with London gas oil and New York ULSD both posting sharp gains.

The rally reflects a tight global product market during the annual peak demand season rather than simply higher crude prices. Russia’s decision to restrict diesel exports has added another layer of pressure following repeated Ukrainian attacks on the country’s refining system. The attacks have reduced effective processing capacity at a time when seasonal demand is strong and alternative supplies are already constrained. Together with renewed instability in the Middle East which has increased concern about regional refining capacity and product exports, it is increasingly about whether sufficient refining capacity is available in the right locations to turn crude into diesel, jet fuel and gasoline.

A barrel of oil that cannot be processed, or cannot reach a refinery operating at normal capacity, offers limited relief to consumers facing tight fuel availability. Weekly reports from the EIA highlight the strain in the US market, with refined product exports hitting a record 8.7 million barrels per day in the latest reporting week, drawing down domestic inventories. Distillate stocks, including diesel, fell by 5 million barrels to a four-year low, while a 1.9 million-barrel decline in gasoline inventories pushed them to their lowest seasonal level since 2012.

Gold passes another stress test

Precious metals remain caught between signs of returning demand and a renewed deterioration in the macro backdrop. Yet gold’s behaviour this week has been notable for its resilience. Considering what was thrown at bullion - surging oil and fuel prices, hawkish signals from the FOMC minutes, rising yields and traders once again entertaining the possibility of a US rate hike - gold has held up well. The metal found support ahead of USD 4,050 before rebounding as the dollar and yields subsequently softened.

The price action supports our belief that gold has moved from capitulation to consolidation. However, it does not imply that bullion is ready to resume its previous uptrend, but it suggests that the forced liquidation phase may have run its course and that sellers are finding it increasingly difficult to trigger another major downside move.

The dollar may also be showing signs of buying fatigue. Despite renewed geopolitical tension and a more hawkish rates debate, it has traded broadly unchanged so far this month. This comes at a time when speculators in the futures market has raised bullish dollar bets against eight IMM futures to a ten-year high, potentially reducing the willingness of traders to chase further strength without a fresh catalyst.

The consolidation view could still be challenged if oil and fuel prices continue to rise. A sustained energy shock would increase the risk of inflation remaining elevated for longer, potentially keeping yields high and forcing markets to price a more aggressive Federal Reserve response.

However, given the recent weakness in US jobs data, we do not believe the FOMC will automatically reach for the rate-hike button simply because energy prices rise. The Fed faces an increasingly uncomfortable trade-off between inflation risks and signs of softer labour demand, leaving incoming data critical for both the dollar and precious metals.

Weather puts soft commodities back in focus

At the top of the performance table so far this month, risk premiums across tropical commodities have continued to rebuild, with cocoa and Arabica coffee both surging on renewed weather concerns. The threat of an emerging El Niño - potentially one of the strongest in 75 years according to the US Climate Prediction Center - has intensified focus on supply risks.

Such a development could exacerbate hot and dry conditions in West Africa, posing a threat to cocoa production, while also creating challenges for coffee producers in Brazil. Heavy rains there have already delayed this year’s harvest and raised questions about expectations for a record crop.

These developments highlight how an El Niño event can have very different regional impacts, while also underscoring the risk of rising volatility. Relatively small changes in weather forecasts can trigger outsized price moves in markets that are already tightly balanced.

Recent price action reflects this instability. Cocoa swung from solid gains to a loss before rallying again, with the front-month future reaching a November high. Arabica coffee experienced a particularly volatile week, whipsawing from its biggest one-day gain in 26 years on Monday to steep declines over the next two days before staging a strong comeback on Thursday.

The key question is whether the current rallies develop into genuine physical supply concerns or remain primarily weather-premium events. For now, the scale of the gains - cocoa up more than 27% this month and Arabica coffee around 18% - suggests traders are unwilling to ignore the risk.

Freight rates may be nearing peak after more than doubling

Global container freight rates rose for a tenth straight week, but the modest 2.4% gain suggests momentum may be fading after prices more than doubled since early May. The Drewry Composite Index now stands at a 22-month high of USD 4,639 per 40-foot container, with key China–US and China–Europe routes up over 120%.

Demand has been driven by early holiday ordering, tariff uncertainty, and longer voyages have effectively absorbed vessel capacity, while higher fuel costs stemming from disruption in the Strait of Hormuz have added further pressure to freight costs.

However, sentiment has softened as some carriers plan to resume shorter Red Sea routes, potentially easing capacity constraints and lowering rates. That outlook remains uncertain following renewed US strikes on Iran, which risk prolonging disruption in the region.

From capitulation to selective consolidation

The broader commodity picture is gradually improving, but the rebound remains uneven and not a synchronised reflation trade. The Bloomberg Commodity Index has recovered part of its May-to-June decline, liquidation pressure has eased and several markets are responding strongly to fresh supply risks. Yet, industrial metals remain subdued, precious metals are still navigating a difficult rates environment, and crude oil has shown surprisingly limited conviction despite renewed Middle East tensions.

Instead, leadership comes from markets where supply risks are most visible: diesel, cocoa and coffee. That suggests the current phase is best described as selective consolidation rather than the start of a new broad-based commodity bull market. The next test will be whether stabilising energy prices, softer yields and signs of dollar buying fatigue allow the recovery to broaden. Until then, supply shocks are doing most of the heavy lifting.

Finally, as I and thousands of market participants across the world prepare to leave work to enjoy their annual summer holiday, it is worth noting that this period tends to reduce liquidity, potentially increasing volatility. This comes at a particularly difficult time, when frequent commentary from the White House continues to trigger short-term market reactions that often fail to develop into sustained trends amid subsequent clarifications or counterstatements.

Enjoy your summer holiday.