04-02-2025
Ceilings in 2025? $80 oil, $4 natural gas, $4.50 copper, $5 corn
Hedge funds defy Trump in commodities, elevating sell-stop risks
Some combination of WTI crude oil staying above $80 a barrel, $4 per million British thermal unit natural gas, $4.50-a-pound copper and $5 corn may be needed for broad commodities to add to January's bounce. Managed money (hedge fund) net longs jumped in January along with futures open interest, indicating upside enthusiasm — and sell-stop risks.
New year commodity exuberance may face price ceilings
Are commodities breaking out higher or at elevated autocorrelation risk? This is a key question at the end of January, and our bias is the latter. Open interest in futures tracked by the Bloomberg Commodity Index has jumped about 8% in 2025, which is normal for the first month and indicates new longs, but speculator longs have risen more. At about 9% of open interest as of the latest data, hedge funds are the most bullish since 2Q23. Absent a supply shock, we see downward leanings, particularly if President Donald Trump gets his way in energy.
WTI crude may have peaked around $80 a barrel, natural gas just above $4 per MMBtu, copper at about $4.50 a pound and corn approaching $5 a bushel. Macroeconomic prerequisites for rising commodities may include a higher US stock market, Bitcoin, weaker dollar and stronger China.
Deflating bond yields counter commodity inflation
Falling government bond yields are inconsistent with rising commodity prices. The downtrend in global yields, especially facing potential US tariffs, may place an inordinate burden on stocks and Bitcoin to keep rising to avoid deflation reciprocal to recent inflation. At about 120 bps less than the US Treasury 10-year, the average yields of the top five governments by GDP point to deteriorating demand-pull forces. Is the almost-5% January bounce in the Bloomberg Commodity Index suggesting reflation and higher bond yields, or is it a feint?
Our hunch is the latter, notably if WTI crude oil has peaked around $80 a barrel. The graphic shows a reason for crude to breach cliff's-edge support at about $68 — plunging bond yields, led by China. Similar peak inklings in natural gas, copper and corn may portend an ebbing tide.
What of commodities if stocks, Bitcoin decline?
President Trump's shift to cryptocurrency enthusiast may put Bitcoin in the forefront of markets that need to keep going up in 2025 to avoid deflation, notably from China. That's emphasized by our annual performance scorecard showing the highly speculative and volatile digital asset stretched on the top and Bloomberg US Treasury 20+ index near the bottom, which may portend reversion potential. Lower energy prices and interest rates are stated goals of the president, which may solidify ceilings at about $80 a barrel crude and $4 per MMBtu natural gas.
What's notable is gold's 37% gain year over year to Jan. 30 vs. only 25% for the S&P 500 total return. The metal beating stocks is not a good sign for global economic underpinnings. If Bitcoin backs up, it could buttress the old guard store of value.
Gold may be gaining momentum, footings in 2025
The least-elastic precious metals on the top of our annual performance scorecard, and highly autocorrelated grains on the bottom, could have trend continuation inklings in 2025. Gold's roughly 55% gain vs. crude oil's almost 20% decline since the leaders of China and Russia announced their 'unlimited friendship' in February 2022 may emphasize geopolitical tensions favoring the precious metal. Absent President Xi Jinping shifting away from President Vladimir Putin and toward Donald Trump, we see gold continuing to rise, especially if the stock market and/or Bitcoin decline.
Without a poor growing season, the grains may do what's normal and gravitate toward break-even costs, which for corn is about $3.75 a bushel. Industrial metals are vulnerable to China in decline as indicated by its plunging bond yields.
