Commodity Market 2025: Global Tariff Shadow Looms

The global commodities market is increasingly muddled, beset by sluggish economic growth and the looming uncertainties brought on by U.S. tariff policies. What challenges lie ahead for the commodities landscape next year? According to a report released by the Bank of America Merrill Lynch on November 24, 2023, titled "2025 Commodity Outlook," a stronger U.S. dollar may drive down commodity prices, yet divergent performance across sectors will present both challenges and opportunities for investors.

One of the key insights from the report is the anticipated oversupply in the global oil market by 2025, primarily attributed to increased production outside the Organization of the Petroleum Exporting Countries (OPEC). The report forecasts that the price of Brent crude will hover around $65 per barrel, with expectations that U.S. natural gas supply and demand dynamics will continue to tighten inventories.

The supply and demand for base metals are expected to fluctuate significantly, while gold is projected to strengthen due to persistent macroeconomic uncertainties, with a target price set at $3,000 per ounce. Short-term price declines for copper and aluminum are likely, although a rebound is anticipated in the latter half of the year.

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The oil market is poised for change, as the anticipated growth in non-OPEC supply overshadows a general weakness in demand. As per Bank of America Merrill Lynch's projections, global GDP growth for 2025 and 2026 is expected to reach 3.3%. However, the ongoing tensions in global trade may dampen economic activity, adversely affecting demand for most cyclical commodities like oil and industrial metals in the first half of 2025. Thus, the dominant tone for the global energy market in 2025 is one characterized by oversupply and sluggish demand growth.

The expected surge in production from non-OPEC countries, coupled with potential increases from OPEC+, may lead to an oversupply cycle in the crude oil market. The report predicts an average price of $65 per barrel for Brent crude and $61 per barrel for West Texas Intermediate (WTI) throughout the year.

In more detail, the major contributors to oil supply growth in 2025 will include the United States, Brazil, Canada, and Guyana. The recovery of U.S. shale oil production and additional capacity from the Gulf of Mexico are projected to elevate U.S. output by 350,000 barrels per day for the year.

Brazil's subsalt oil projects are set to come online between 2024 and 2026, with large floating production storage and offloading units (FPSOs) such as Mero 3 and Buzios 7 expected to add around 300,000 barrels per day in new supply. Meanwhile, Guyana's Yellowtail project is expected to start production in the latter half of 2025, contributing an additional capacity of 120,000 barrels per day.

This increase in production from non-OPEC countries could exert pressure on OPEC+, despite the latter's ability to adjust output levels to maintain market equilibrium. However, OPEC+'s influence appears to be waning, with projections indicating that the alliance’s output will grow by only 290,000 barrels per day in 2025, significantly lesser than the 1.4 million barrels per day expected from non-OPEC producers.

On the demand side, factors such as slowing global economic growth, a tepid recovery in emerging markets, and a stronger U.S. dollar will weigh heavily on oil consumption. Bank of America Merrill Lynch estimates that global oil demand will only increase by 1.1 million barrels per day in 2025—a far cry from the increases anticipated from the non-OPEC supply.While geopolitical tensions in the Middle East may support oil prices in the short term, such influences are unlikely to counterbalance the fundamental pressures of supply and demand.

In contrast to the oil market's forecasted woes, the natural gas sector is expected to shine, contrasting the overall sentiment toward crude oil. Potential future policies may include the resumption of natural gas export licensing rounds, as the Federal Energy Regulatory Commission has already approved numerous liquefied natural gas (LNG) export facilities.

Driven by increased winter demand and ongoing infrastructure development, the average price of natural gas at the U.S. Henry Hub is projected to reach $3.33 per million British thermal units (MMBtu), surpassing 2024 levels. Rising import demands in Europe, particularly during cold snaps or geopolitical escalations, are still likely to tighten the LNG market and spark short-term price increases.

Additionally, the transition to renewable energy sources is fortifying the position of natural gas within the energy mix. As the demand for LNG trucks and gas-fired electricity generation rises, natural gas is cementing its role in the evolving energy landscape.

The metals market in 2025 is expected to showcase differentiation, influenced by long-term demand growth from energy transition against the backdrop of supply chain constraints, creating a complex pricing environment. In the midst of persistent macroeconomic uncertainties and risk-averse sentiments, gold remains one of the most attractive precious metals for 2025.

Bank of America Merrill Lynch projects that notwithstanding the headwinds presented by a strengthening dollar and rising interest rates in the short term on gold prices, the metal is set to breach the $3,000-per-ounce mark in the latter half of the year as global debt levels continue to surge and macro risks intensify.

Several critical policy areas highlighted by Bank of America are expected to influence gold prices directly through interest rates and the dollar:

Deregulation (bearish for gold): A broad deregulation across energy and financial services could bolster economic growth, reflected in rising interest rates.

Fiscal Policy (bearish for gold): The individual tax cuts outlined in the Tax Cuts and Jobs Act may see extensions, alongside new tax measures expected to promote short-term growth while exerting upward pressure on interest rates.

Tariffs imposed on foreign imports could dramatically impact market dynamics in the short term. If domestic currencies feel the heat from tariffs, emerging market central banks may lose their appetite for accumulating gold.

Federal Reserve Rate Cuts (bearish for gold): Should the economic fundamentals remain strong and tariffs are jacked up significantly, the Fed might pause rate cuts, while tighter immigration flows could present additional inflationary risks.

The outlook for silver remains equally promising, driven by industrial demand from photovoltaic panels and other sectors, with projections suggesting a rise from $30 to $40 per ounce. Furthermore, copper and aluminum, viewed as core beneficiaries of the energy transition amid rising demand from electric vehicles, solar energy, and grid upgrades, may see pricing rebounds in 2025.

While short-term pressures may weigh on copper prices due to demand weakness, a rebound is expected as global economic conditions improve in the latter half of the year, with prices anticipated to rise from $8,500 per ton to $10,500 per ton. Notably, the aluminum market is expected to shift into a supply deficit phase, projecting prices to potentially exceed $3,000 per ton by 2025.

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