Quarterly Commodity Outlook - Halftime Whistle: Fundamentals Take the Field

Introduction

Halftime! After a first half dominated by geopolitics, supply-chain disruptions, and rapidly shifting policy expectations, commodity markets are entering a new phase. While headlines drove prices for much of the year, the spotlight is now shifting back to fundamentals.

The resilience of commodities has been remarkable. Despite the unexpected strength of the US dollar—a traditional headwind for dollar-denominated assets—the Bloomberg Commodity Total Return Index (BCOMTR) remains up around 15% year-to-date. That resilience reflects how tight underlying market balances have been, even as prices have recently retraced from their mid-May highs. The correction has been driven largely by easing geopolitical tensions and improving trade flows rather than weakening supply-demand fundamentals.

Looking ahead, inventories, production trends, weather, and end-user demand are set to reclaim center stage. While geopolitical risks have not disappeared, they are likely to become more episodic. At the same time, depleted inventories, constrained spare capacity, and less flexible supply chains leave many commodity markets vulnerable to even modest disruptions. In other words, the narrative is changing: fundamentals are back in the limelight, and they are likely to be the key driver of commodity performance in the second half of the year.

Crude oil and oil products

The first six months of the year were nothing short of a rollercoaster for oil markets. Brent crude started at USD 60 per barrel, doubled to almost USD 120 by the end of April, and then plunged back to USD 70 by June. Investors rode every twist and turn: initial panic over a massive supply crisis gradually gave way to relief as markets adapted, alternative supplies emerged and demand adjusted. What turned out as the most severe oil supply disruption in modern history ultimately proved manageable for a certain time. But to be clear: two more months of outage would have pushed the world closer to the brink, a risk that is still there if the MoU falls apart.

So, what prevented a 12 million barrel per day (mb/d) supply shortfall (equivalent to more than 10% of the global oil market) from turning into a full-blown global energy crisis?

• Massive global inventory cushions: The world entered the year with very high oil inventories, commercial inventories but also floating oil on water. Un-sanctioning Iranian and Russian floating oil unlocked additional supply.
• Unprecedented SPR releases: OECD countries responded swiftly by announcing large-scale emergency releases from their Strategic Petroleum Reserves (SPR).
• Record US exports: The United States stepped up as the market's balancing supplier, exporting record volumes of crude oil and petroleum products to Asia and Europe.
• China's import slowdown: One of the biggest surprises was China. For several months, they imported several mb/d less than usual (a stunning 7 mb/d less per end of June). Part of the decline reflected strategic stockpile drawdowns, while weaker activity in its heavily overbuilt petrochemical sector also played a role. Yet a meaningful portion of the drop remains unexplained, prompting analysts to question whether China may be experiencing structural demand destruction rather than a temporary slowdown.
• Demand destruction across several countries: High prices eventually did what high prices are meant to do: reduce consumption via working from home orders and reduced work weeks, particularly in Southeast Asia.

The interim deal in mid-June appeared to end the crisis. The reopening of the Strait of Hormuz (SoH) allowed stranded tankers to leave the Gulf, and markets largely assumed the oil story of the year was over - or at least paused until the US midterm elections. Consequently, oil prices came down rapidly as recently stranded oil barrels all reached the global market at the same time, while the US was still over-exporting and Chinese demand still under-importing. Early July proved otherwise. Drone attacks on LNG and oil tankers near Oman, followed by US sanctions and military responses and further Iranian retaliation, underscored that tensions remain high. With the ceasefire still fragile, risks around the SoH remain elevated and could again deter shipping activity.

Despite the renewed escalation, we do not expect the MoU to collapse. However, we believe that the coming months, and possibly years, are likely to be marked by intermittent strikes, harsh rhetoric, and periodic flare-ups. We do not think that this will matter much for crude oil flows going through the SoH, as both sides have strong incentives to keep oil flowing. The US wants to avoid higher gasoline prices ahead of the midterm elections and additional inflationary pressure, while Iran stands to benefit economically from their oil exports and potential transit revenues through the SoH. Also, the fact that certain red lines have not been crossed indicates that both sides are not in full escalatory mode: The US has avoided targeting civilian infrastructure, while Iran's responses have been limited to US military facilities in the Middle East. Oil infrastructure has remained untouched, and countries not hosting US forces have largely been spared.

We currently favor holding carry spreads in crude oil with an overweight in longer dated contracts and underweight in shorter dated contracts. Contrary to crude oil, we like oil products such as gasoline and diesel.

Diesel markets have tightened significantly as Ukrainian drone attacks stepped up massively and disrupt Russian refining operations. Russian refinery outages have risen to around 3.8 mb/d, which is more than half of the country's refining capacity. Consequently, Russia banned diesel exports, that usually account for around 11% of global exports. As a result, European diesel crack spreads have surged to record highs which could cause refineries to maximize their diesel production again while reducing gasoline output. This comes at the peak time of “driving season” with the highest gasoline demand of the season and low inventories simultaneously.

Natural gas

We remain constructive on European gas despite the reopening of the SoH which led to a recovery in exports from the Persian Gulf, which supplied about a fifth of global LNG before the war. Prices (TTF) corrected from around €60/Megawatt hour in mid-March to €40/MWh by mid-June, but have since started to recover, moving back towards €48/MWh in early July. While crude oil flows through the SoH have largely normalized, LNG shipping flows are recovering more slowly, leaving effective export capacity constrained well into Q3. LNG carriers tend to be more cautious with respect to security conditions, as they are highly specialized vessels operating under strict safety and risk-management protocols. Even isolated incidents seem to disrupt overall traffic for several days. For example, no LNG tanker passed through the Strait for several days at the end of June after renewed Iranian threats and reports of missile activity at an LNG vessel at the beginning of July led some tankers to reverse course or delay their journeys again. In the long run, however, we could face an oversupplied LNG market which could exert downward pressure on prices since the current Middle East crisis has led to more LNG terminals being approved for investments.

At the same time, Europe finds itself in a challenging position. Gas storage levels were only around 50% full at the beginning of July, well below 5-year average levels of roughly 65% at this time of the injection season (see Figure 1). With storage refill rates slowing in recent weeks, Europe needs to attract a significant volume of spot LNG cargoes ahead of winter. Otherwise, a colder than normal winter can lead to stockout. However, securing those cargoes is becoming increasingly difficult. Asian demand picked up significantly in recent weeks and absorbs a large share of available (US) LNG supply. Adding to the challenge, Europe has experienced unusually high temperatures over the past several weeks, with forecasts pointing to continuously above-average heat in the weeks ahead. This could support increasing gas demand for power generation and cooling, intensifying competition with Asia for spot LNG cargoes.

The biggest downside risk to our constructive view would be a Russia-Ukraine deal. Such a development could revive expectations of increased Russian gas availability. Market participants have speculated that a number of European corporates would be willing to resume purchases of Russian LNG spot cargoes under Russian sanctions relief. At the same time, Ukraine has been hitting Russian oil refinery system hard. If they were to do the same with gas, let’s say initiate a drone attack on Yamal LNG facility, this would hit an already constrained gas market for the next months and would likely cause a gas price rally.

By contrast, we currently maintain a bearish position in US natural gas. Although high temperatures across the US continue to support strong cooling demand, inventory builds have remained robust due to equally strong production growth. In addition, significant new pipeline capacity in the Permian Basin is expected to come online later this year. Until recently, production in the region has been constrained by transportation bottlenecks and depressed Waha hub prices, which limited the ability to move excess gas to other markets. As new pipeline infrastructure becomes operational, these constraints are expected to ease, potentially making an additional 1–2 bcf/d of gas available to the market. The combination of resilient production, improving takeaway capacity, and continued storage injections is weighing on the price outlook. Current projections point to end-October 2026 inventories approaching 4.0 Tcf, placing storage levels near the upper end of the historical range. As a result, despite supportive weather-driven demand in the near term, we believe the fundamental backdrop remains sufficiently well supplied to justify a cautious stance on US natural gas.

Precious metals

After an exceptionally volatile first half of the year (gold surged above USD 5,400 per ounce at the end of January before retreating to around USD 4,000 by the end of June) we expect prices to remain broadly range-bound in the third quarter, with upside potential outweighing downside risks. Since March, the key drivers of gold prices have shifted from a debasement narrative back toward sensitivity to real interest rates, with gold once again exhibiting a strong inverse relationship with expectations on US policy rates (see Figure 2). Total gold ETF holdings peaked at 100.9 million ounces around the onset of the Iran conflict and have since declined by 4.5% to levels last seen in September 2025, making ETF outflows the primary driver of the recent price correction. While geopolitical risks and ongoing central bank purchases continue to provide an important floor for prices, these factors are currently being outweighed by the market's focus on monetary policy and a surprisingly hawkish FOMC press conference mid-June by the new Fed Chair Kevin Warsh. Consequently, the US-Dollar appreciated against all currencies which put additional pressure on gold. Warsh gives Congressional testimony on 14th July. We believe, with materially lower oil prices versus two months ago and a weak labor market report, there is no need for him to adopt a hawkish tone again in this hearing. This is why we believe that gold should have found its bottom.

We remain constructive on gold over the medium term. The structural pillars underpinning the gold bull market remain firmly intact, including ongoing reserve diversification by central banks, resilient physical demand from Asia, concerns surrounding elevated sovereign debt levels, and sustained demand for portfolio diversification. That said, these supportive factors are unlikely to dominate as long as monetary policy around the world is rather on a restrictive path. In our view, the next meaningful catalyst for gold will likely come from the Federal Reserve. Once markets gain confidence that 2026 is not the starting point for a new tightening cycle, ETF flows should turn supportive again. This would create the conditions for gold to break out of its current trading range and resume its broader long-term uptrend.

Our outlook for silver is comparatively more cautious. Since June, we have preferred to approach silver from an underweight position. Over the coming months, our positioning may move tactically between underweight and neutral depending on developing fundamentals and prices. We believe the silver market is approaching an inflection point. After five consecutive years of deficits, the market is likely to return to surplus from next year onward, and we believe prices are increasingly beginning to reflect this shift in fundamentals. Silver's dual role as both a precious and industrial metal is currently creating headwinds on both fronts. As a precious metal, silver continues to face the same challenges as gold, namely a higher-for-longer interest rate environment and persistent ETF outflows. At the same time, its industrial demand outlook is becoming less supportive. Negative growth rates in Chinese solar installations, combined with strong incentives for thrifting and efficiency gains following the sharp rise in silver prices over the past year, is reducing the contribution of one of silver's key demand drivers from the past few years. Given its higher volatility and dual exposure to both monetary and industrial cycles, silver is likely to remain more vulnerable than gold in a risk-off environment. As a result, we expect silver to continue underperforming until either the monetary policy backdrop or the industrial growth outlook becomes more supportive.

Industrial metals

Industrial metals have remained very resilient this year, particularly given the headwind from a stronger US dollar. In our view, copper's price performance continues to be driven by two dominant themes: the AI-story and US import tariffs. A significant portion of copper's price premium above significant lower production costs reflects investors' conviction that demand will rise sharply over the coming years as a result of data center construction, grid expansion and continued strong renewable energy investment. While the latter has undoubtedly been supportive, we believe the market is currently assigning a too optimistic value to the future copper demand from AI capex. Nevertheless, as long as investors maintain their bullish positioning and remain committed to the long-term demand narrative, copper prices are unlikely to experience meaningful correction. This is particularly noteworthy given that global copper inventories are currently far from tight, as we highlighted in our previous quarterly outlook. However, the composition of these inventories matters. A large share of the apparent surplus is concentrated in the United States, where stockpiles have massively increased over the last 12 months ahead of a potential tariff decision. Consequently, the next major move in copper is likely to be determined by US trade policy.

Following the 30th June deadline for the Commerce Secretary's review, markets are expecting the administration to clarify its position on copper tariffs in the coming weeks. We see three possible scenarios:

1. No tariffs are implemented: In this case, COMEX copper prices would likely face significant downside pressure, as the rationale for maintaining elevated inventories in the US would largely disappear. Material that had been diverted into the US in anticipation of tariffs could once again seek alternative destinations
2. No immediate decision, but tariffs remain under consideration: This would probably result in some short-term price weakness reflecting investors’ disappointment. However, inventories would likely remain within the US system, limiting the extent of any correction. 
3. A phased tariff framework is announced: For example, tariffs of 15% from 2027 and 30% from 2028. This would be the most bullish outcome for copper prices. Such an announcement would likely trigger an additional surge of imports into the United States ahead of implementation, further drawing material away from global markets. As a result, COMEX prices would benefit directly, while tighter availability elsewhere could also provide support for LME copper. 

Agriculture

Similar to other sectors, developments in the Middle East dominated the agricultural commodities landscape during the second quarter of 2026. Rising input costs (such as diesel) and concerns over potential fertilizer supply tightness during the Southern Hemisphere planting season, contrasted with generally favorable US planting. In addition, expectations of a particularly strong El Niño weather pattern ahead attracted renewed investor interest in agricultural commodities. Our outlook for agriculture commodities turned more constructive compared to previous quarters. The overarching theme is a potential demand-led market while risks of regional production shortfalls are rising.

Corn appears balanced between supportive and bearish factors. On the surface, global inventories levels remain comfortable, production prospects in major exporting countries continue to improve and US crop conditions in key growing regions are currently within historical levels. The demand side seems to be reasonably supported with good feed demand and high ethanol usage. An important upside risk could emerge from China. Should the fulfillment of the current trade agreement lead to a meaningful increase in purchases of US-origin corn – something that has not been seen in recent years - global demand expectations could improve materially and provide additional support to prices.

Soybeans are likely to be the primary beneficiary of any increase in Chinese agricultural purchases, making us more constructive than earlier in the year. According to the US fact sheet, China has committed to purchase 25 million metric tonnes of US agricultural products. Reports also indicate that China returned to the US soybean market in early June, purchasing 5–10 cargoes for September and October delivery. These purchases, together with improving trade relations between Washington and Beijing, have provided a meaningful demand catalyst. Markets also discuss the removal of US fentanyl-related tariffs which could lead to China eliminating its remaining 10% tariff on US agricultural products. If confirmed, US soybeans would become highly competitive relative to Brazilian and Argentinian supplies, potentially broadening demand beyond state-owned importers such as Sinograin and COFCO. While record South American production continues to cap the upside and limits the potential for a sustained bull market, the demand outlook has improved sufficiently for us to move towards a neutral stance. We remain more positive on soybean oil, where robust biofuel demand and strength across the broader vegetable oil complex continue to provide structural support.

In wheat, fundamentals remain comparatively weak all in all, which could lead to higher prices going forward. On the one hand, export flows continue to be robust, harvest progress across major producing regions has generally been favorable, and global supply conditions remain comfortable. On the other hand, there are some pockets of concern. Australia is facing one of its weakest wheat harvests in recent years, with the emergence of a drier El Niño weather pattern expected to reduce production by around 25%. In the United States, winter wheat crop conditions also remain poor by historical standards, with only 26% of the crop rated good-to-excellent, providing a modestly supportive factor for prices.

Within agriculture, we currently see the most attractive opportunities emerging in the soft commodity complex. The key theme across softs is the growing risk associated with a strong El Niño weather pattern, which could adversely affect crop yields, and, in some cases, prompt export restrictions aimed at safeguarding domestic supply (see Figure 3).

Sugar has become increasingly compelling. What began as a year of a comfortably supplied market is gradually evolving into a more balanced (and potentially deficient) one. Brazil's increasing allocation of sugarcane towards ethanol production, continued export restrictions in India, and weather-related risks across Asia have all contributed to a significantly more constructive outlook. With prices still trading near multi-year lows and managed money maintaining substantial net-short positions, the market offers an increasingly attractive risk-reward profile. Cocoa also stands out as a potentially bullish opportunity. Production prospects in Côte d'Ivoire have deteriorated meaningfully, while forecasts continue to point towards a strong El Niño event. Given cocoa's high sensitivity to West African weather conditions, any further deterioration in crop prospects could tighten an already fragile supply outlook. Although elevated prices may eventually weigh on consumer demand, near-term market direction is likely to remain driven primarily by supply-side developments. Coffee has become one of the most volatile markets within the commodity universe lately. Expectations of a sizeable global surplus have been challenged by disruptions to the Brazilian harvest, declining inventories, and increasing concerns over El Niño-related weather risks. While we are not yet ready to adopt a structurally bullish stance, particularly given expectations for a record Brazilian crop of around 75 million bags, the recent market behavior suggests that producer selling has remained restrained, contributing to tighter nearby supply conditions. The combination of weather uncertainty, potential short covering, and declining exchange inventories creates an increasingly favorable backdrop for tactical opportunities going forward.

Conclusion

While geopolitical risks remain elevated and will continue to generate periods of volatility, they are likely to act as catalysts rather than the primary direction of prices. Instead, tightening inventories, weather developments, production trends, and evolving demand patterns are set to become the key determinants of market performance. Against this backdrop, we continue to favor commodities where fundamentals remain tight or are improving, while remaining selective in markets where expectations already appear overly optimistic. In our view, the second half of the year will reward disciplined investors who focus less on the headlines and more on the underlying market balances.