Commodities: the year that was, the year that could be

Over the past year, variable weather patterns and geopolitical factors have significantly influenced commodity prices.

Heating oil prices fell due to a mild end to the 2023–2024 winter and a mild start to the 2024–2025 winter.1 Pacific Ocean surface temperatures flipped to El Niño conditions, lowering agricultural grain prices and raising coffee prices.

Increasing peacetime debt loads of Western countries and the propensity to use reserve currencies as a foreign policy tool for sanctions lifted gold prices.2 Given their influence, we are surprised by the lack of attention commodities receive from those who are so concerned about climate change and sovereign nation's increasing indebtedness.

There are six main subsectors of the Bloomberg Commodity Index.3 Only one of those six had negative returns.4 The one subsector with a negative return was agricultural grains.

A drop in corn (-10.2%), wheat (-15.2%), and soybeans (23.5%) held back agricultural grains.5 A normalization of weather patterns following La Niña conditions lessened the severity of droughts in the US, allowing for good crop yields.6 Falling fertilizer and fuel prices lowered input costs, helping farmers increase the acres planted, and disruptions from the Russia-Ukraine War were not as high as expected.

The five subsectors with positive returns are energy, agricultural softs, industrial metals, precious metals, and livestock:

• Energy subsector return was positive despite only one of the six commodities having positive returns. The heavier weighting to natural gas (+33.8%) more than compensated for the declines in both US-grade crude (-5.0%) and European-grade crude (-5.3%), as well as steeper declines in heating oil (-14.1%) and diesel (-7.5%).4 Natural gas is a favorite underweight in active commodity portfolios due to its volatility, and prices were volatile this year. However, many broad commodity funds that are either active or feature-optimized roll yield underperformed the plain, boring, but comprehensive passive indices like the Bloomberg Commodity Index, which includes natural gas.3 The weakness in crude price was driven by OPEC’s announcement in June to increase production, which has since been delayed three times.7,8 Additionally, some remaining geopolitical risk was removed from the price in November due to developments in the US and Middle East.

• Agricultural soft sector returns were boosted by eye-opening returns in coffee (+70.8%) and sugar (+29.9%).4 Extreme weather in tropical growing regions constrained the supply of coffee and sugar, leading to shortages and price increases. Coffee prices benefited from a return to pre-pandemic levels of demand for out-of-home coffee.9,10 However, the overwhelming factor was dry El-Niño weather earlier this year, which has caused many to worry about multi-year crop damage in South and Central America. The same weather conditions also held Brazilian sugar production below estimates.

• Industrial metals were led by a rise in zinc (+17.1%), although aluminum (+9.9%), copper (+4.6%), and lead (+0.5%) also contributed.5 Only nickel (-3.4%) detracted.4 Zinc and aluminum prices fell close to some mines' all-in-sustaining costs after 18 months of disappointing China stimulus. However, those low prices caused some marginal supply reductions, and the price rebounded.11

• Precious metals were led by gold (+27.5%) and silver (+29.0%). Nearly a three-year spate where the message driving gold flows has stayed the same.4 Central banks are buying enough gold to offset the gold the exchange-traded fund investors sell.12,13 Investors’ motivation to sell has shifted from income available from higher interest rates to chasing equity and crypto returns. Central banks’ motivation to buy remains to marginally diversify their foreign exchange reserves away from US dollars and treasuries and into gold.

• The livestock sector also rose slightly as hog prices rose +20.7%, and cattle prices rose 8.2%.4 Feeder cattle supplies entered the year at the tightest level in a decade, and ranchers needed higher prices to inspire herd growth.14

2025, may you live in interesting times

A famous Chinese blessing loosely translates to "may you live in interesting times." It also doubles as a curse, as change can be cut both ways.

The fiscal and monetary stimulus post-global financial crisis and post-COVID have raised liquidity, creating dramatically higher price levels for goods and services and even higher asset prices. If you were among the 50% of Americans with some stock ownership, your cost-of-living increases have been softened by investment asset growth. However, if not, you will have a cost-of-living increase with an insufficient pay increase.

Global economic reordering

The resulting dysphoria is not only felt in the US, where it metastasized and played a part in US election outcomes but also became a globally developed market phenomenon. As interest rates creep north from zero, debt issues abound, contributing to unstable politics in the US, UK, France, Germany, and others.

Scott Bessent, the nominee to lead the US Treasury under the incoming Trump administration, best summarized his position when he said, "We are going to have some kind of grand global economic reordering. I'd like to be a part of it. I've studied this."15

The reordering of the global trade system, away from globalization toward regionalization, will profoundly impact supply chains and global commodity trade. Globalization lowers inflation by expanding the number of suppliers, while friendshoring – or nearshoring – or regionalization reduces the number of acceptable suppliers and threatens to raise inflation by limiting supply. Limiting supply is typically a recipe for higher prices.

The global economic reordering and the threat of limited supply occur at a time when fund managers are unusually underweight commodities in their portfolios, having been convinced inflation is a defeated foe. The view is despite the $3.4 trillion in crypto market value, which represents either money supply growth or a large wealth effect, depending on your point of view.16

China: encouraging economic data points

China has always been an important factor in commodity valuation but did not participate in the shock and awe level of the COVID stimulus that characterized the Western world. China has recently seen several encouraging economic data points, including a pickup in manufacturing activity.17 Recent stimulus efforts have targeted lower borrowing costs for corporations via the one-year loan prime rate (LPR) dropping to 3.10% from 3.85% in 2022 and lower mortgage rates via the five-year LPR rate dropping to 3.60% from 4.65% in 2022.18,19 In addition, loans to property developers to finish projects, encouragement to banks to lend for mortgages with lower down payments, and local government debt refinancing have occurred within the last few months.

Market observers monitor conditions for a pain trade or price movement that no one has on their radar. In 2025, a commodity bull market is a prime candidate for the pain trade. The evidence is before our eyes: US large cap equity price-to-earnings ratios are 22x, toward the high end of a range from 11 to 23 post-financial crisis, even while company margins are 12% for two quarters in a row, and 2025 earnings are estimated to rise 15%.20

Valuation metrics can always become more extreme, but the higher levels argue for diversification at a time when it has been forgotten.

A run through the commodity landscape

We believe 2025 promises to be a year of meaningful policy changes that commodity markets will need to process on the run. Some of these dramatic policy changes – or campaign promises – have already been indicated.

Oil

“Drill, baby, drill!” doesn't pay anymore.

During President Trump's prior administration, private petroleum producers in the US were motivated by production. Higher oil production resulted in higher CEO pay, regardless of profit; however, since then, pay packages have been restructured, and higher profits are necessary for higher CEO pay.

We may see more permits issued for drilling on federal land, more pipelines approved, and perhaps even a refinery, but higher oil production will need stable, high oil prices. The administration is targeting an additional 3 million barrels of oil production, but importantly, natural gas and liquefied natural gas exports count toward that total, and many analysts already expected a two million barrels per day (bpd) increase from natural gas.21 Additionally, we expect an oil policy of Texas, not Teheran. Iran's oil production fell from 3.8 mm bpd to 1.9 mm bpd due to sanctions during Trump's first term but quickly rebounded to nearly 3.3 under Biden, who lifted the sanctions to fight energy inflation.22

Our outlook remains for oil to average $70–85 per barrel.

Natural gas

Natural gas prices are heavily winter-weather dependent. Daily natural gas demand during winter far exceeds the ability to supply it, requiring a significant amount to be stored ahead of time.

Mild winters result in stranding natural gas in storage until the following winter. Last year, Europe received its third mild winter in a row, and the US had its warmest winter on record.1,23 The loss of North Stream I and II pipelines occurred in 2022, and they are not expected to be replaced in the near future.24

The US Artificial Intelligence data center boom has strained electricity excess capacity, recently evidenced by a 20-year contract to reopen and operate Three Mile Island Unit 1 to supply a Microsoft data center.25,26 Increasing the output from natural gas-fired electricity generators is another option that could potentially raise natural gas prices.

Gold and silver

Central bank's affinity for gold may increase in the coming year due to the proliferation of sanction and tariff discussions from the new US administration. Investors may change from a multi-year selling spree if they also start to value diversification.

Broad valuation metrics make poor timing indicators, but major markets cause some hesitation. US equity valuations are relatively high in large caps, while fixed income markets fixate on the post-pandemic debt hangover with US debt to gross domestic product (GDP) of 122%, a deficit to GDP of 7%, and high yield bond spreads at 131 basis points – the lowest in 40 years.27,28,29 Some diversification may be warranted.

Silver is often underappreciated for its potential to increase as the Chinese economy rebounds becomes more clear.

Platinum and palladium

Platinum and palladium have been in a bear market since 2020, when the only thing spreading faster than the COVID virus was the acceptance that everyone would buy only electric vehicles (EVs) in the future.30,31 Under that scenario, automakers would no longer generate 40% of platinum and 80% of palladium demand, and investors have been selling since.32

The market has been net short of palladium since August 2021.33 But 2024 was the year automakers pulled back from their EV plans. Deloitte released an auto consumer survey showing that 88% of US consumers still prefer an auto with a gasoline-powered engine or hybrid gasoline/electric powertrain that requires platinum or palladium for pollution control.34,35

Platinum and palladium prices have not responded even though both markets are in a supply deficit.36,37 Outcomes may not match the talking points, but the new administration would like to eliminate EV subsidies, eliminate future EV-only mandates, and claw back unspent Inflation Reduction Act clean energy funds, which could shift consumer preferences toward internal combustion engine and hybrid-powered vehicles.28

Industrial metals

The US will likely formally leave the Paris Climate Accord on January 20, having left under the first Trump administration only to rejoin during the Biden administration.39,40 US EV subsidies will likely end early next year as well. Governing by executive order creates significant policy uncertainty for the mineral extraction industry. It requires stability because it takes an average of 29 years to transition a mine from exploration to working output.41

The energy transition is on a four-year bipolar cycle in the US, largely still aspirational in Europe, overachieving in China, and unaffordable in most emerging markets (EMs). Still, projections for copper and zinc demand outstrip supply over the next few years, while aluminum surplus falls.42,43

Agriculture

Weather calls are always tricky, but last year, our view noted the potential for the flip from La Niña to El Niño to moderate droughts in the US, helping grain production even if it puts weather in South America and West Africa at risk and potentially harms sugar and cocoa production. Those calls turned out correct with hearty price moves, raising soft agriculture prices, and lowering grain prices.44 Now that El Niño is fading and flipping to La Niña, we reverse the call.45 The outlook for 2025 is for higher agricultural grain prices and lower agricultural soft prices.

2025, the year that could be

Investors will likely age by more than one year in the next 12 months if the 2016–2020 period is any precursor based on US policy dynamics alone. Commodities are broadly under-owned at a time when most inventories are historically low and global trade terms are being remapped by politicians who are on a very short leash by voters feeling economic fear-of-missing-out pain. It is not unreasonable to think that six of the seven G7 country's leaders may change between 2024 and 2025.[46] And with a resolution to the Russia-Ukraine War and the Israel-Iran proxy conflict in 2025 being another possibility, EM countries, for the first time, may offer more political stability than some developed ones. If that were the case, we would indeed live in some very interesting times.

Robert Minter is director of ETF investment strategy, abrdn.

ii is an abrdn business. 
abrdn is a global investment company that helps customers plan, save and invest for their future.

1 "The winter that wasn’t: US had historically warm season from coast-to-coast." AccuWeather, March 2024. https://www.accuweather.com/en/winter-weather/the-winter-that-wasnt-us-had-historically-warm-season-from-coast-to-coast/1627081.
2 El Niño is a naturally occurring climate pattern that occurs when the ocean surface in the eastern tropical Pacific Ocean becomes warmer than average.
3 The Bloomberg Commodity Index is a broadly diversified commodity index consisting of 24 commodities weighted by global production value adjusted for liquidity and for monetary assets.
4 Bloomberg, 12/31/2023–11/30/2024. Note: For this review, all year-to-date returns are through November 30.
5 Returns via FactSet Research Systems, Inc., 12/31/2023–11/30/2024.
6 La Niña is a naturally occurring climate pattern that occurs when the ocean surface in the eastern tropical Pacific Ocean becomes colder than average.
7 The Organization of the Petroleum Exporting Countries, or OPEC, is an intergovernmental organization that coordinates the production polices of leading oil producing countries.
8 "OPEC Plus Postpones Plan to Increase Oil Output for Three Months." The New York Times, December 2024. https://www.nytimes.com/2024/12/05/business/opec-plus-oil-production-delay.htm.
9 "Supply Concerns Push Coffee Prices Sharply Higher." NASDAQ, December 2024. https://www.nasdaq.com/articles/supply-concerns-push-coffee-prices-sharply-higher.
10 "Report: US Out-of-Home Coffee Drinking Highest Since Pre Pandemic." Daily Coffee News, September 2024. https://dailycoffeenews.com/2024/09/23/report-us-out-of-home-coffee-drinking-highest-since-pre-pandemic/.
11 "South Africa's platinum mining industry in terminal decline, Northam CEO says." Reuters, August 2024. https://www.reuters.com/markets/commodities/south-africas-platinum-mining-industry-terminal-decline-northam-ceo-says-2024-08-30/.
12 Bloomberg, ETF gold ounces held, 12/31/2021–11/30/2024.
13 "Central bank buying slowed further in Q3, but year-to-date total remains strong." Gold Demand Trends Q3 2024. World Gold Council, October 2024.
14 "2024 Cattle Prices Hit New Highs." Feedlot Magazine, March 2024. https://www.feedlotmagazine.com/news/industry_news/2024-cattle-prices-hit-new-highs/article_19e9a6f8-e140-11ee-8464-0b22fc32b5b0.html.
15 "Scott Bessent Sees a Coming ‘Global Economic Reordering." He Wants to Be Part of It." The Wall Street Journal, November 2024. https://www.wsj.com/politics/policy/scott-bessent-sees-a-coming-global-economic-reordering-he-wants-to-be-part-of-it-533d6e71.
16 "Bitcoin’s Trillion-Dollar Comeback: The Market Shift You Can't Ignore." Forbes, December 2024. https://www.forbes.com/sites/bernardmarr/2024/12/09/bitcoins-trillion-dollar-comeback-the-market-shift-you-cant-ignore/.
17 "China Manufacturing Activity Continues to Build Up Steam, Caixin PMI Shows." Caixin Global, December 2024. https://www.caixinglobal.com/2024-12-02/china-manufacturing-activity-continues-to-build-up-steam-caixin-pmi-shows-102262872.html.
18 Loan prime rate (LPR) is a key policy rate of the Chinese economy.
19 Bloomberg, LPR one-year and five-year rates, 12/31/2021–11/30/2024.
20 "S&P 500 Reporting Net Profit Margin Of At Least 12% for the 2nd Straight Quarter." FactSet, October 2024. https://insight.factset.com/sp-500-reporting-net-profit-margin-of-at-least-12-for-the-2nd-straight-quarter#.
21 "Heard on the Street Recap: Raining Threes." The Wall Street Journal, November 2024. https://www.wsj.com/livecoverage/stock-market-today-dow-sp500-nasdaq-live-11-25-2024/card/heard-on-the-street-recap-raining-threes-3CG7y3dgXRUdwMQJaUaZ.
22 Bloomberg data Iranian oil production, 1/1/2016–10/31/2024.
23 "Temperature and thermal stress." European State of the Climate 2023. European Commission, 2024. https://climate.copernicus.eu/esotc/2023/temperature-and-thermal-stress.
24 North Stream pipelines were two major natural gas pipelines that ran under the Baltic Sea from Russia to provide Western Europe with natural gas.
25 Three Mile Island Unit 1 was a 2,568 MWt pressurized water reactor that began operation in 1974 and was decommissioned in 2019.
26 "Three Mile Island nuclear plant will reopen to power Microsoft data centers." NPR News, September 2024. https://www.npr.org/2024/09/20/nx-s1-5120581/three-mile-island-nuclear-power-plant-microsoft-ai.
27 Gross Domestic Product (GDP) is a measure of the total value of goods and services produced in a country.
28 Bloomberg BAA 10 year spreads 1/1/1985–11/13/2024.
29 "Policy Basics: Deficits, Debt, and Interest." Center on Budget and Policy Priorities, November 2024. https://www.cbpp.org/research/federal-budget/deficits-debt-and-interest#.
30 Bloomberg, platinum two-year negative returns, 2021 and 2023.
31 Bloomberg, palladium three-year negative returns, 2021, 2022, and 2023.
32 "Latest Russia sanctions unlikely to impact near-term PGM markets, but there may be longer term benefits." Platinum Investment, April 2024. https://platinuminvestment.com/investment-research/perspectives/latest-russia-sanctions-unlikely-to-impact-near-term-pgm-markets-but-there-may-be-longer-term-benefits.
33 Bloomberg, net length palladium contracts, 12/31/2020–11/30/2024.
34 Deloitte is a professional services network that offers services in audit, consulting, financial advisory, risk and tax.
35 "Tracking consumer trends in the automotive industry." 2024 Global Automotive Consumer Study. Deloitte, January 2024. https://www.deloitte.com/global/en/Industries/automotive/perspectives/global-automotive-consumer-study.html.
36 "WPIC: Platinum Market Facing Third Consecutive Deficit in 2025 as Supply Constraints Persist." Investing News Network, November 2024. https://investingnews.com/wpic-platinum-market-forecast/.
37 "Updated palladium supply/demand outlook: Reduced supply and stronger near-term demand prolong larger deficits." Platinum Investment, May 2024. https://platinuminvestment.com/investment-research/essentials/updated-palladium-supply-demand-outlook-reduced-supply-and-stronger-near-term-demand-prolong-larger-deficits.
38 The Inflation Reduction Act is a law passed in 2022 that aims to reduce inflation and combat climate change.
39 The Paris Climate Accord is a binding international treaty on climate change signed by 196 parties in 2016.
40 "Why Trump’s 2nd withdrawal from the Paris Agreement will be different." Politico, November 2024. https://www.politico.com/news/2024/11/10/trump-withdrawal-paris-agreement-different-00188002.
41 "US mine development timeline second-longest in world, S&P Global says." Reuters, July 2024. https://www.reuters.com/markets/commodities/us-mine-development-timeline-second-longest-world-sp-global-says-2024-07-18/.
42 "BHP bets billions on Chile mines to face global copper crunch." Mining.com, November 2024. https://www.mining.com/web/bhp-bets-billions-on-chile-mines-to-face-global-copper-crunch/.
43 "Global aluminum market seen closer to balance in 2025, Rusal says." Reuters, September 2024. https://www.tradingview.com/news/reuters.com,2024:newsml_L8N3LC0BS:0-global-aluminium-market-seen-closer-to-balance-in-2025-rusal-says/.
44 Bloomberg, wheat, soybean, and corn price, 12/31/2023–11/30/2024.
45 Bloomberg ENSO, 12/31/2020–10/31/2024.
46 G7, or the Group of Seven, is an intergovernmental forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.