IT WAS a difficult and challenging year for major commodities in 2024. Brent crude oil peaked at around US$90 per barrel in the second quarter, and has since retreated to around US$75 per barrel.
Copper – another barometer of the health of the world economy – peaked at just under US$11,000 per tonne in the second quarter, and fell to the US$9,000 per tonne level in December.
Gold, on the other hand, will continue to benefit from economic and geopolitical uncertainties, and continue its strong run in the new year.
Both Brent crude oil and copper’s volatile price actions are symptomatic of an increasingly challenging backdrop for the global economy.
After the initial euphoria from the latest round of stimulus, investors have come to acknowledge that China’s economic recovery remains fraught with challenges.
Much still needs to be done to restructure the massive debt overhang in the domestic property sector. Both consumer and investor confidence in China have yet to recover meaningfully, and thus, retail spending growth remains weak, and the money supply continues to contract.
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Adding further pressure to China’s weakening economy is the daunting prospect of even higher trade tariffs next year from a second Trump administration. Thus, we have downgraded China’s gross domestic product growth forecast in 2025 by 0.3 percentage point to 4.3 per cent. Realistically, it is becoming increasingly difficult for China to achieve its 5 per cent growth target.
In Europe, the growth outlook is increasingly challenging too. Amid the Russia-Ukraine conflict, eurozone countries now need to spend much more fiscally for their collective defence.
This higher indebtedness is coming at a time when growth for both Germany and France, traditionally the eurozone’s twin industrial powerhouses, are now near borderline recessionary levels. Specifically, France’s sovereign rating has been cut recently due to the worsening budget and political crisis.
Thus, it is no surprise that the European Central Bank has been actively cutting rates, dropping its benchmark refinancing rate from 4.5 per cent at the start of 2024 to 3.15 per cent by December. This year is likely to be challenging for both France and Germany. In particular, Germany’s federal election in February has the potential to inject even more uncertainty into the economy.
Trade tariffs provide another overhang
For Brent crude oil, the historical dynamics among the key energy producers have now been overturned. The Organisation of the Petroleum Exporting Countries (Opec) is finding it increasingly difficult to stabilise crude oil prices and maintain market share. This is because they have increasingly ceded market share and pricing power to the US.
With a daily production of about 13.5 million barrels per day, the US is now the world’s largest producer of crude oil.
US energy production has jumped over the past decade under the initial expansion from the first Trump administration and the follow-up expansion by the Biden administration. In contrast, forced to maintain its production cuts, Saudi Arabia’s crude oil production is now much lower at just nine million barrels per day. In short, the US now produces about 50 per cent more crude oil each day than Saudi Arabia.
With slowing growth from both China and eurozone, the outlook for global energy demand has been repeatedly downgraded by Opec. Thus, the threat of oversupply keeps Brent crude oil prices depressed.
We see another challenging year for Brent crude oil around its current levels of US$70 to US$75 per barrel. In addition, we cannot rule out the risk of Brent crude oil falling below US$70 should the second Trump administration ramp up both China and global tariffs significantly in 2025.
Copper has lived up to its nickname of “Dr Copper” – which refers to the ability to use the commodity’s prices to predict the health of the economy. With prices struggling just under US$9,000 per tonne by end-2024, “Dr Copper” is signalling more weakness and pain ahead for the global economy in 2025.
In particular, copper prices are very allergic to the fears of China’s economic slowdown. With China’s industrial activity yet to rise meaningfully, stocks of copper on major exchanges worldwide have picked up.
The cash spread for copper is at a large discount, implying weak immediate demand. Thus, we have a negative outlook for copper and see it sliding further to US$7,500 per tonne by end-2025.
Upside possible for Brent crude oil and copper
It is important to note that while the short-term outlook for both Brent crude oil and copper are decidedly negative, the medium to longer-term outlook may be entirely different.
For Brent crude oil, the futures curve is mostly flat and there does not seem to be much risk premium priced in. This is despite the ongoing conflicts and geopolitical risks across the Middle East. Any escalation in the region could crimp the supply of crude and send prices upwards.
As for copper, it is well acknowledged that over the medium term, there is an increasing risk of supply deficits. Lower supply from ageing copper mines will fail to catch up with rising demand from the green transition and the increasing global adoption of electric vehicles.
Thus, price takers and consumers of both Brent crude oil and copper may take advantage of the lower current prices to hedge their future needs.
Gold to continue rally
However, one particular commodity is benefitting strongly from economic and geopolitical uncertainties. Gold has had a very strong year in 2024, rallying by about one-third from US$2,000 per ounce in January to the current level at around US$2,600 per ounce.
From a longer-term perspective, the positive drivers remain intact – including ongoing emerging-market and Asian central bank allocation into gold, and strong physical gold and jewellery demand from the retail sector.
There is a common thread running through the rising demand from central banks and the retail sector. Both are driven by the need to diversify away from rising geopolitical concerns and uncertainties around the US dollar, ahead of disruptive trade and fiscal policies from the second Trump term.
We remain confident of our positive view for gold as long-term safe haven demand needs will likely stay strong amid a further rise in geopolitical and economic risks from Trump 2.0.
We see gold rising further to eventually US$3,000 per ounce by the end of 2025. Immediate strength in the US dollar may trigger some near-term consolidation in gold before it resumes its rally as 2025 progresses.
The year ahead will bring differing fates for Brent crude oil, copper and gold.
Both Brent crude oil and copper will likely be weighed down by the worsening economic growth outlook for China and Europe.
Concerns over the disruptive impact from higher trade tariffs under the second Trump administration will also be negative for these two commodities. This is despite the generally constructive outlook for the US economy.
However, gold will likely benefit from the uncertainty and continue its strong rally in 2025.
The writer is head of markets strategy at UOB