Commodities Outlook: What’s Driving Oil, Gold, and Base Metals

Oil Market Outlook & Geopolitics

• Geopolitical risk premiums for oil spiked to over $15 per barrel following Middle East escalation, but collapsed to roughly $2 per barrel within 24 hours as prices returned to pre-escalation levels.
• Options markets currently estimate the probability of significant supply disruptions at less than 4%, reflecting trader reluctance to price in shocks given recent history of no actual flow interruptions.
• The Goldman Sachs base case assumes no supply disruptions; however, sharp declines in Iranian supply could spike crude above $90 per barrel, while a sustained Strait of Hormuz disruption could push prices above $110 per barrel.
• Downside risk for oil is forecast at another $10 per barrel decline over the next 12 months due to global supply growth running four times faster than demand.
• Supply growth is driven primarily by OPEC+ unwinding voluntary cuts and non-OPEC non-U.S. shale producers (including Brazil, Guyana, Norway, and Kazakhstan) increasing output by 1 million barrels per day between August and the previous month.
• U.S. shale is expected to see modest declines or flat production in 2025–2026 due to lower price assumptions, reversing a decade-long trend where U.S. shale drove 100% of global supply growth.
• China is expected to accelerate energy diversification away from foreign oil and gas imports following the conflict, bolstering domestic coal and electrification supply, which supports green metals like copper while remaining bearish for oil.

Gold & Central Bank Demand

• Goldman Sachs maintains a bullish stance on gold, projecting prices to rise to $4,000 per troy ounce (approx. 20% upside), driven by structurally higher central bank demand.
• Central bank gold purchases have increased fivefold since 2022 following the freezing of Russian reserves; a recent survey of 70+ central banks indicated record high purchase intentions with zero respondents planning to reduce holdings in the next 12 months.
• Gold is expected to benefit most from dollar diversification and lower interest rates, particularly if the market environment becomes "risk-off" due to U.S. recession fears or fiscal sustainability concerns.
• A potential secondary driver for gold prices involves a reallocation of private investor capital out of dollar-based assets, which could significantly move prices given gold's market size is only 200 times smaller than the S&P 500 and 100 times smaller than U.S. Treasuries.
• Over the last two months, gold has shown a positive correlation with the 30-year U.S. Treasury yield, rising when market worries about U.S. fiscal sustainability increase.

Trade Policy & Tariffs

• A looming July 9th tariff deadline and existing trade policies are creating immediate tightness in global metal markets as traders rush to ship copper into the U.S. prior to potential 25–50% import tariffs.
• Inventory levels outside the U.S. (including China) have fallen to approximately 10 days of consumption, exerting significant upward pressure on global metal prices.
• Existing tariffs have already led to significant price increases for U.S. steel (50% tariff) and aluminum (50% tariff), with copper facing a potential 25% tariff and upside risk toward 50%.
• The U.S. copper market is currently pricing in only a 15% tariff, whereas Goldman Sachs' base case anticipates a 25% tariff with risk skewed toward 50%.

Industrial Metals & Fiscal Spending

• Industrial metals, specifically nickel and copper, are positioned to benefit from structurally higher defense spending, with the U.S. defense industry accounting for roughly 5% of copper demand and 13% of nickel demand.
• Recent NATO summits suggest Europe may raise defense spending to 3.5%–5% of GDP, a trend that will take time to materialize but supports long-term metal demand.
• Fiscal deficits in the U.S. and Europe, alongside defense spending, favor industrial metals over energy sectors as the primary winners of these macro trends.

Energy Demand & Weather Impacts

• Recent heatwaves in the U.S., Europe, and China are creating tight summer power markets, increasing the risk of price spikes and potential outages, particularly in the U.S. Mid-Atlantic PJM market.
• U.S. summer power demand is growing faster than GDP, driven by data centers and electrification, while supply growth relies heavily on weather-dependent solar and wind sources amid scheduled coal retirements.
• Global oil demand is forecast to grow by only 600,000 barrels per day (0.6%) this year, a stark contrast to the 25% year-to-date surge in copper demand in China driven by solar installations and electrification.
• China's oil demand is considered to have peaked due to the rapid shift from gasoline/diesel to electric vehicles and LNG/electric trucks, widening the gap between GDP growth and oil consumption.
• Seasonal oil demand remains strong in July and August due to cooling and travel needs, but this is insufficient to offset the structural divergence between slowing oil demand growth and robust metal demand.

Final Consolidated Outlook for H2

• Gold: Highest upside potential due to central bank buying, dollar diversification, and hedging against fiscal/tariff risks.
• U.S. Copper: Significant upside driven by tariff-induced supply tightness and strong defense/fiscal demand.
• Oil: Greatest downside risk, projected to fall $10 per barrel over the next 12 months due to oversupply conditions.