10 December 2024
Research Briefings | Global
Five key themes for commodity markets next year
◼ Theme one: President Trump's administration will make major energy policy announcements
early next year intending to expand US oil production and boost LNG exports. As such, we think
US energy prices will rise temporarily in reaction to the policy shifts. But we do not expect the
announcements to change market fundamentals next year given the weak price environment—
which will discourage producers from boosting supply—and the long lag between projects
approvals and their completion.
◼ Theme two: The US will impose blanket tariffs on Chinese exports by 2026, and China will
retaliate, weakening economic growth and commodity demand. Top-level economic growth will
not be greatly affected and, with it, demand for energy and agricultural commodities. However,
the sectoral impact will be more severe, especially for metal-intensive traded goods like
automotives. We assume the US will reimpose a blanket tariff increase on all steel and aluminium
imports, driving US steel prices higher due to its high import dependency. Soybeans prices will be
hit by China’s retaliatory tariffs, as excess US soybean exports are diverted to other markets.
◼ Theme three: The strong dollar will put downward pressure on commodity prices. Commodity
prices and US dollar moved in tandem in the aftermath of the Russia-Ukraine war, reversing the
historically negative relationship. While structural reasons persist, such as the emergence of the
US as a net energy exporter—temporary factors have faded, resulting yet again in a negative
correlation between the dollar and non-energy commodity prices, which will weigh on demand of
commodity-importing countries in 2025.
◼ Theme four: A structural slowdown in China, by far the largest consumer of commodities, will
drag on commodity demand next year without further stimulus. Consequently, commodities with
high dependence on Chinese demand, such as iron ore, will face price pressure next year.
◼ Theme five: OPEC+ faces another challenging year as the group sets to unwind production cuts
based on its relatively bullish global oil demand compared to market consensus. Currently, it is
set to unwind cuts in Q2 but could push them back to later in the year as the market enters a
surplus. We do not view the risk that Trump's stricter sanctions on Iran's oil will leave room for
the group to increase its production quotas.
Chart 1: Trump administration to result in weaker commodity prices
Source: Oxford Economics/Haver Analytics
Stephen Hare - Lead Economist - share@oxfordeconomics.com
Kiran Ahmed - Lead Economist - kahmed@oxfordeconomics.com
Diego Cacciapuoti - Economist - dcacciapuoti@oxfordeconomics.com
Samuel Bakst - Economist - sbakst@oxfordeconomics.com
Five key themes for commodity markets next year
Trump will announce broad-based
energy policies soon after taking office
Within the first 100
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we expect a broad range of energy policy
announcements intending to boost the US oil
and gas sector. The recent appointment of
former energy executive Chris Wright as the next
secretary of state for energy compounds this
view. We expect there to be a mismatch between
the headline announcements and the impact
these policies have, given bearish market
fundamentals and long lag times until
implementation.
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larger effect for natural gas than oil through
boosting US liquified natural gas export capacity.
On his first day in office, he has pledged to repeal
the current administration's freeze on LNG export
permits, a policy which was enacted in January
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commitments. We expect prices in the US to
increase following these announcements
although their impact will dissipate later in the
year due to the very long delay for the additional
capacity to come online. In Europe, additional US
LNG capacity will be welcome news as the
continent continues to wean itself off Russian
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the brand-new LNG export projects in the Gulf of
Mexico coming online ramping up their
operations.
In the oil sector Trump is expected to expand
drilling permits in a bid to increase oil production
particularly in Alaska. Onshore and offshore
drilling permits are another potential avenue to
expand production although producers would
consider a weaker price environment (around
$72pb) to overshadow any policy change. On the
demand side, we do not think the repeal of the
Inflation Reduction Act (IRA) will have much of an
effect on oil demand through the changes to
government support for EV purchases. Even with
the subsidies, EV sales in the US have been weak
suggesting other factors are keeping drivers from
switching to EVs.
consequence will be slightly weaker global
economic growth than we forecast before the US
election, offset by robust fiscal and investment
spending in the US. We forecast demand will,
therefore, be only slightly weaker for energy and
agricultural commodities, but increased
uncertainty and supply chain disruption could
impact prices. However, while top-level economic
growth will not be too affected, the sectoral
impact is more severe, especially for metalintensive goods such as automotives and
machinery.
We also assume that the US will reimpose a
blanket tariff increase on all steel and aluminium
imports as happened during the previous Trump
presidency. One-quarter of steel consumption in
the US relies on imports, and there is limited
scope to raise output to completely offset the
loss of imports. Consequently, due to the US's
high import dependency and increased fiscal
spending boosting demand, we forecast steel
prices to rise in H1 2025 and 2026. Our steel price
forecast is over 17% higher than our baseline
forecast before the US election by 2026.
One of the commodities most likely to fall victim
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imposed retaliatory tariffs on US soybean imports
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international prices to plunge as excess US
soybeans flooded global markets. We assume
similar retaliatory measures will be implemented
in H12026, resulting in a drop in soybean prices
as Chinese buyers cut back sharply on importing
from the US. Although Chinese buyers have
recently diversified to other suppliers, in
particular Brazil, China still accounts for around
half of US exports. As a result, we expect this
surplus US export volume to depress world prices
for soybeans. Partly as a result of these tariffs, we
expect soybean prices to be around 8% below
our pre-election baseline by the end of 2026.
US tariffs will impact commodities
We assume the US will impose blanket tariffs of
30% on Chinese exports from 2026, and China
will retaliate. We also believe that Japan, South
Korea, and Vietnam will face targeted US tariffs,
and more countries could follow. The
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Stephen Hare - share@oxfordeconomics.com
Five key themes for commodity markets next year
Chart 2: US steel prices and soybeans
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Interest rate differentials will remain in favour of
the US relative to other advanced economies.
Tariffs will also likely put some upward pressure
on the dollar as other countries attempt to offset
the impact of a US-imposed tariff through
devaluing their currency.
In this strong-dollar environment, it is useful to
revisit a Bank of International Settlements bulletin
from 2023 that highlighted the changing nexus
between commodity prices and the dollar, with
the correlation between commodity prices and
the dollar shifting from negative to positive
between 2021 and 2023 (Chart 3).
Source: Oxford Economics/Haver Analytics
Dollar strength and commodities
Commodity prices have been trading lower since
Trump's election, apart from natural gas and
agricultural commodities (Chart 2) that have
rallied on the back of supply-side factors. In our
view, what is driving most commodity prices
lower are concerns over global demand and
tariffs, higher Treasury yields, and a stronger
dollar. The stronger dollar, in particular, will
weigh on demand of commodity-importing
countries. China, for example, is the largest
importer of commodities, especially metals. A
weaker yuan will raise the cost of its imports of
USD-denominated commodities, reducing metal
demand and prices.
Chart 3: Most commodities have been trading
lower since Trump's election
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Chart 4: The relationship between commodity
prices and the dollar has reversed in part
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Source: Oxford Economics/Haver Analytics
The reasons of this change were both structural—
the emergence of the US as a net energy
exporter (Chart 4)—and temporary: the nature of
the 2022 shocks to the global economy that
pushed commodity prices higher and prompted a
steep rise in investors' risk aversion, boosting the
dollar.
Chart 5: The US has become a net energy
exporter
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Source: Oxford Economics/Haver Analytics
Expectations of a less aggressive monetary
loosening cycle in the US than in Europe have
contributed to the dollar appreciation, alongside
fiscal loosening and the Fed's high nominal
interest rate. And risks to our forecast for the US
trade-weighted dollar are skewed to the upside.
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Source: Oxford Economics/Haver Analytics
Stephen Hare - share@oxfordeconomics.com
Five key themes for commodity markets next year
We revisit these results and find that while the
structural factors have persisted, with WTI oil
prices still positively correlated with the dollar,
the temporary factors have faded, meaning the
correlation between non-energy commodities
and the dollar has approached zero.
Looking ahead, we expect the strong dollar to
weigh on imports of dollar-denominated
commodities, and put pressure on prices, with
non-energy commodities that will be under
particular pressure from the appreciating dollar.
While oil prices and the dollar are still positively
correlated, this analysis does not imply that a
stronger dollar will push up energy prices. Rather,
the causal mechanism is the opposite, with
higher oil prices that boost the US terms of trade,
which in turn boost the dollar.
China slowdown will weigh on demand
The Chinese economy has shown positive signs
since policy easing in October. However, markets
were left underwhelmed by the stimulus, and
external risks have increased since the US
election, which has seen most commodity prices
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uncertain, but we anticipate growth will slow
further next year. China is the principal consumer
of commodities and is the largest importer of oil,
soybeans, and iron ore, to name a few, and
slowing economic growth will drag on demand.
The property sector has shown tentative signs of
improvement but will likely continue weighing on
metal demand. Similarly, industrial production
has lost momentum, and will slow further in 2025.
The "three new industries" comprising EVs,
renewable power generation, and storage will
continue to be prioritised, offsetting some
demand weakness for copper, aluminium, and
battery metals. But the surge in production of
solar panels and EVs has increasingly diminished
demand opportunities for oil and natural gas,
which will grow more modestly next year,
especially while facing weaker economic growth.
higher commodity demand and prices than our
baseline.
OPEC+ anticipates unwinding cuts in
early 2025
We think oil demand weakness will persist into
next year, particularly in China as its latest
announcement of fiscal easing failed to reassure
markets. As such we expect OPEC will unwind
cuts in Q2 next year with risks tilted towards
further delays. As prices dip closer to $70 per
barrel, the group will continue to face compliance
issues amongst members that seek to boost
production to support their market share. Saudi
Arabia, which acts as the group's swing producer,
will continue to vote for delays to cuts as it aims
to support prices.
Looking towards the potential impact of a Trump
presidency, risks remain to the implementation of
US
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could raise the quota for other members. As Iran
sells over 90% of its oil exports to China at a
discounted price, we are unconvinced that
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oil trade, leaving no room for OPEC+ to increase
its quotas.
Chart 6: We view the oil market to be looser
than OPEC+ next year
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Source: Oxford Economics/IEA
Our forecasts assume Beijing will announce more
fiscal support measures in March when the
legislative body gathers to approve its budget.
We anticipate a step up in efforts to raise fiscal
spending by an additional CNY2trillion–
CNY3trillion, complemented by two more rate
cuts of 40bps in 2025. This could help maintain
the positive domestic momentum we have seen
recently into next year. More significant stimulus
than we currently anticipate risks supporting
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Stephen Hare - share@oxfordeconomics.com
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