Editor’s Note
Commodity markets continue to show strength, with the Bloomberg Commodity Index rising 1.7% this week. Gains in energy and agriculture, driven by geopolitical risk and supply concerns, have more than offset a seasonal lull in industrial metals. The index is now up 9% year-to-date.
Commodity markets demonstrated resilience again this week, with the Bloomberg Commodity Index rising approximately 1.7%. Geopolitical tensions, supply concerns, and resilient demand offset the weakness in industrial metals due to the Lunar New Year holiday. The index, which tracks the performance of 25 major commodity futures, has gained 9% year-to-date and 15% over the past 12 months. Energy and distillates led the gains due to rising Middle East risk premiums, while wheat prices were pushed higher by weather threats and uncertainty in the Black Sea region. Precious metals consolidated within established ranges, while soft commodities fell sharply due to the continued plunge in cocoa prices. Meanwhile, macro factors—including cautious signals from the Federal Reserve and extremely crowded US dollar short positions—added an important cross-asset dimension to the commodity market, potentially influencing its performance in the coming weeks.
The focus in cross-asset markets this week shifted away from AI-driven earnings concerns and the recent broad risk-off sentiment triggered by stock market volatility. While commodities were briefly affected, the sector’s performance still outpaced most financial assets, benefiting from structural supply constraints, resilient consumption, and an increasingly uncertain geopolitical environment.
Monetary policy expectations remain a significant influencing factor. The latest Federal Open Market Committee (FOMC) meeting minutes reinforced policymakers’ hesitation regarding further interest rate cuts, reflecting concerns about persistent inflation and financial stability. This cautious tone pushed US Treasury yields higher and intermittently supported the US dollar, limiting the upward momentum of interest-rate-sensitive assets like gold.
Simultaneously, a Bank of America survey showed that sentiment towards the US dollar is extremely pessimistic, with short positions at record levels, reflecting market expectations of a weakening US economy and eventual Fed rate cuts. A sustained weakening of the dollar would be beneficial for commodities, but the crowded nature of this trade means that if US economic data surprises to the upside, it could trigger a sharp short-covering rally, potentially temporarily depressing commodity prices.
This dynamic, combined with the Fed’s hesitation to cut rates, explains why the US dollar rose about 1% this week while other major currencies weakened across the board.
The energy market was the dominant factor this week, with Middle East tensions pushing crude oil prices to a six-month high. After a warning from former President Trump that Iran had a maximum of 15 days to reach a nuclear deal, traders grew increasingly concerned about the risk of diplomatic efforts failing. The possibility of supply disruptions at the Strait of Hormuz, one of the world’s most critical oil chokepoints, triggered significant hedging activity.
The options market reflected this shift in risk perception: Brent crude call option volume exceeded 344,000 contracts on Thursday, about 90% higher than the three-month daily average, while put option volume was less than half of that, indicating strong demand for upside protection.
Global supply remains ample, and limited disruptions could likely be absorbed by the market. However, the vulnerability of shipments through the Strait of Hormuz, combined with the region’s importance to global exports, means the market must now consider the risk of prolonged disruption rather than a short-term shock.
Natural gas was a clear laggard in the energy sector. After surging to nearly $8 per million British thermal units (MMBtu) three weeks ago, it fell below $3/MMBtu this week for the first time since last October. The current weakness is primarily due to expectations of slowing winter demand and ample supply prospects.
Gold continued to trade within a wide range of $4860-$5140 per ounce. Geopolitical tensions and central bank buying provided underlying support, but rising US Treasury yields, a stronger dollar, and the Fed’s cautious stance limited upward momentum. However, gold recently demonstrated relative resilience against a strengthening dollar, highlighting its support from investor portfolio hedging demand.
Silver outperformed gold this week, but its technical picture remains constrained, requiring a decisive break above $86 per ounce to attract new momentum and confirm a resumption of the uptrend. Until then, prices may remain volatile, reflecting its dual nature as both a monetary and industrial metal.
This week, the gap between COMEX deliverable registered inventories and the open interest in the SIH6 contract entering the delivery month on February 27 narrowed to 151 million ounces by Thursday’s close, a 25% reduction from last week. The March-May contract roll spread widened steadily and modestly to about 61 cents (with the March contract underperforming May), indicating manageable roll pressure at present.
Industrial metals traded thinly, with the Lunar New Year holiday reducing market participation in Asia, particularly in China, the world’s largest consumer of base metals. This seasonal lull highlighted that recent price strength is highly dependent on Chinese demand.
Copper prices edged lower, still pressured by rising exchange inventories (reaching 1.05 million tonnes, a 23-year high) and long liquidation. However, long-term support comes from demand related to electrification, grid expansion, and the energy transition. Market focus will shift to post-holiday demand signals and inventory trends in China to gauge short-term direction.
Singapore iron ore futures fell for a sixth consecutive week, dropping to near $95 per tonne, a seven-month low. The decline reflects signs of market easing: rising port inventories in China, seasonal weakness in the steel market, and increased production from major miners.
