We are starting a new section on commodities which will be a monthly round up of how various commodities are performing, future trends & price outlook. We look at open interest movements across commodities, net investor positioning across commodities, which commodities show backwardation & contango, which commodities show rich volatility premia, CFTC positioning, which commodities show strong momentum etc. Then we look at individual commodities expected price trends. For crude we believe physical demand supply equation means sub 60 levels by end CY25. Based upon current global and OECD inventories, we can even see sub 50 levels by mid CY26. In gold we believe price movement can be summarised as: conviction purchases + opportunistic purchases = sales of existing stock + mining supply. We believe our ratio of net conviction purchases/mining supply is indicating now a intermediate correction in Gold prices. ETFs and speculative hands selling is reducing the net conviction purchases. We are looking for sub-3000-dollar price target with stop loss at 3460 levels. CMP is 3385. In base metails, we estimate a large boost to industrial metals demand from rising EU defence spending. Historical data suggest that defence currently accounts for 2-3% of global copper, aluminium, steel, and zinc demand and 7% of nickel demand. Euro area military spending is expected to rise from 1.9% in 2024 to 2.7% of GDP by 2027, with a large share of this rise to be spent on metals-intensive equipment. We estimate this would translate into cumulative demand boosts by 2027 of 6% for European industrial metals, and globally of 0.4% for steel, 0.9% for copper, and 1.3% for nickel. In summary, we remain bearish on oil for demand supply reasons, bearish on Gold for reducing net conviction purchases flows & bullish on base metals due to expected increase in European defence spending. As Fed embarks on the 125-bps rate cycle by end Q1CY26 as we envisage, we see dollar lower leading to slight support for base metals and crude but not so much for Gold. We see brent sub 60 by end CY25, Gold sub 3k by Q1CY26 and Copper at 480-490 levels by Q1CY26.

In late February’25, President Donald Trump ordered a probe to potentially tariff copper imports. Since then Copper has witnessed the greatest arbitrage trade in recent decades. For the next 5 months, copper traders were at the forefront of a trend in which huge quantities of copper were being brought to the US, where a widening price gap with the international benchmark has created a lucrative arbitrage opportunity. Copper prices at Comex rose sharply against copper prices at LME in the last 5 months. If a trader had done the above arbitrage since Feb, they will have been sitting on almost 50% profits since Feb’25. On 11th July, he announced 50% tariffs on copper w.e.f from 1st August. Implementation from 1st Aug should abruptly close the window for further significant US-bound copper shipments (possibly for the rest of 2025). We now expect a pullback in ex-US pricing to $8,800/t on a 0-3mth view. We also expect the COMEX-LME arb to heavily discount a 50% rate given the significant US inventory build in recent months and the likelihood that key copper exporters to the US will be able to negotiate eventual partial exemptions at a lower tariff rate. We should see the reverse play out as US import demand collapses (with US inventory draws displacing net import requirements) which should relieve ex-US physical market tightness. This should be bearish for LME spreads, LME flat price, and bullish for COMEX spreads in the coming months. We believe that Chile, Canada and Mexico might eventually secure a lower 25% rate as key partners and US copper import sources and because of the excess US copper imports through 1H’25 (which we estimate totalled 400kt), we don’t think 50% arb will be priced in right now. LME copper is still the cheapest across the 3 major exchanges and for Chinese manufacturers who export most of their goods, it remains a decent source of material. Hence for above reasons we expect LME copper prices to outperform Comex copper prices. This should result in the arbitrage opportunity getting normalised at lower historical levels.

For the past few months, we have been of the view that OPEC+ had pivoted to a market share strategy over a price defense strategy. Saudi Arabia wanted OPEC+ to continue with accelerated oil supply hikes in the coming months as it put greater importance on regaining lost market share. Bulk of the output cut for the past 2 years has been born by Saudi. But all the market share loss had been for a futile cause. Shale producers & non opec members have garnered Saudi market share. With oil revenues coming down, Saudi Arabia’s budget deficit ballooned in the first quarter of CY25. The kingdom posted a fiscal deficit of 58.7 billion riyals ($15.7 billion), the highest figure since late 2021 and already well over half the government’s expected gap for 2025 of 101 billion riyals. The kingdom’s deficit may soar to $67 billion this year because of lower oil prices, more than double the government’s current forecast. And this was continuation of deficit trend since Q3CY22 from where the output cuts have begun taking place. No wonder Saudi has decided to regain market share now rather than defending crude price. In today’s OPEC meeting, it decided to increase oil production even more rapidly than expected next month. While the market was expecting another 411kbpd output hike from next month, OPEC decided to hike output by 548kbpd. This will put the group on way to unwind its most recent layer of output cuts one year earlier than originally outlined. The cartel will consider adding another roughly 548,000 barrels a day in September at the next meeting on Aug. 3 which would complete the revival of 2.2 million barrels a day of supply shuttered in 2023. After that, the group has another 1.66 mbpd of idle output to potentially consider. With global demand expected to be weak due to trade wars & tariffs, Chinese demand also remaining weak due to both weak consumption as well as onset of NEVs (New Energy Vehicles), we can expect the oil inventories to rise further in light of faster output increase from OPEC. Saudi’s efforts to regain market share will drive brent prices lower during next few months. We should initially see the 60$ levels being tested on Brent and then a subsequent breach if world growth slows down as we expect tariffs and trade uncertainties play out. To us the recent crude rally due to Iran conflict was a golden opportunity to hedge for crude producers.

Oil markets have reacted sharply to the reports of Israeli airstrikes and other attacks on Iran's nuclear and ballistic missiles infrastructure and several key personnel. WTI & Brent both were up by almost 10% by Friday’s close. However, despite the ~$10/b move higher in oil over the past three days, even a potential 1 mb/d drop in Iranian production is likely not fully reflected in the price yet, let alone an escalation that could involve disruption to energy flows through the Strait of Hormuz. At Friday’s close of Brent at 75$ levels, the geopolitical premium has flared up to $10 above our model-derived fair value of $65, indicating a 15% probability of a worst-case scenario, where supply impact extends beyond the reduction in Iranian oil exports and price reaction is exponential rather than linear. Iran has suffered significant damage to its leadership, military, and industrial capabilities, and its nuclear program, and its response will shape the endgame of this conflict and the future of the region. Our own view is that Israel has slowly & steadily removed several middle east nuisance elements starting with Iranian proxies, Hamas and finally now Iran. In short term it can be a pain but in medium term, this augurs well for a rule based peace in middle east. This should lower the geo political risk premium in crude in medium term. We also believe that Iran’s current leadership is likely to be toppled either by Israel/US attacks or by internal forces. The manner in which Israel has attacked Iranian’s top military leadership, air defence system and missile launching sites implies large scale internal support. This too should augur well for Iranian crude to come back to global market without sanctions. On Iranian oil infrastructure, we estimate that Iran crude production stands at 3.6mb/d, that it produces about 0.8mb/d of condensates, and that total liquids seaborne exports have averaged 1.8 mb/d year-to-date with a large 1.2mb/d contribution from China. Striking Iranian upstream assets i.e. the crude production fields is unlikely to gain favor with the US administration, which would be wary of disrupting oil markets. We can assume a reasonably pessimistic scenario that any potential damage to Iran’s export infrastructure reduces Iran supply by 1.8mb/d during 6 months before gradually recovering. Making the additional assumption that extra core OPEC+ production makes up half of the peak Iranian shortfall, we estimate that Brent jumps to a peak just over $90/bbl but declines back to the $60s in 2026 as Iran supply recovers. The worst case scenario is interruption of trade through Strait of Hormuz where 1/5 of nearly global oil production flows (16 mbpd crude & 5.5 mbpd crude products). Core OPEC+ producers may be unable to deploy spare capacity in this extreme tail scenario. We estimate that oil prices may exceed $100/bbl in an extreme tail scenario of an extended disruption. In summary, we see short term upside risks but medium term downside. OPEC+ supply may raise supply for longer than our base case where OPEC8+ delivers a final increase in August 2025. Also while the risk of a US recession in the next 12 months has declined to 30%, a recession remains more likely than usual given ongoing trade policy uncertainty. With US policy explicit focus on low crude prices, we don’t see Brent sustaining above 80 levels. Either the current Iranian leadership will exit (a high probability event for us) or they will resort to low intensity measures for some time & then cool off the attacks on Israel & accept being a non-nuclear state.

In our 15th Nov’24 dated trade recommendation we have looked optimistically at Silver fundamentals & have forecasted it’s price to rise to 40$. https://macro-spectrum.com/trade-recommendation/long-silver It’s price then was 30$. The worst we saw since the recommendation was 28$ and it is currently trading at 36$. Gold is up 26% this year as an expanding US-led tariff war boosted its safety appeal and central banks maintained elevated levels of buying. Silver had been significantly lagging behind, but is now catching up, with year-to-date gains of 24%. Silver is currently trading at the $36 handle & the break of the psychological 35 handle has meant we have established 14y highs. We have started to see macro participation in topside silver structures mainly via calls, CS and digis, and front-end vols are seeing a decent pickup. Our target is 40$ level where we expect to find short term resistance. Our bullishness on Silver flows from the fact that the silver market is forecast to record another significant deficit (total supply less demand) for the fifth consecutive year in 2025. Also the gold-silver ratio has been one of the most reliable technical ‘buy’ indicators for silver, whenever the ratio climbs above 80. Currently it is at 94 levels. Despite headwinds from firmer UST yields, investor sentiment has improved towards Silver during H1CY25. This largely reflects several macroeconomic and geopolitical risks, which have continued to underpin inflows into safe-haven assets, such as silver and gold. The recovery has been assisted by short covering by tactical investors in the futures market amid fears about President Trump’s tariff plans and a subsequent spike in futures and spot silver prices. We continue to remain bullish on Silver for a short-term target of 40$ for above reasons.

OPEC+ today agreed on another output surge in June, accelerating a revival of supply for a second month as the group’s leaders seek to chastise overproducing members in a strategy shift that has already sent crude prices plunging. Key nations led by Saudi Arabia and Russia agreed today to add 411,000 barrels a day next month. The hike mirrors a similar increase announced last month, when the group made the shock decision to bring back triple the planned volume for May. But beyond the obvious reasons, there are bigger factors at play. Large US companies like Exxon & Chevron continue to increase their output, Saudi now wants a greater market share before the Iranian or even the Russian supplies come online. Saudi also wants other favors from US such as defense guarentees, weapon contracts etc. Trump is visiting Dubai from 13th May so expect a quid pro quo. Oil traders have realised following facts: (1) the US administration will fail to convince markets that its policies are not recessionary, and (2) Kazakhstan will be unable to reassure its OPEC+ partners that it is willing to meet its commitments. Add to this the onset of NEVs (New Energy Vehicles) in China and a structural slowdown in Chinese economy. Hence we expect Brent prices to fall further towards 50 levels by end June. This will lead to a sharp fall in US oil output that will create a price floor of 60 dollars on brent in the medium term.