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

Episode Summary

Executive Summary: Goldman Sachs’ Dan Stroyven argues commodity markets are diverging sharply: oil has limited upside despite Middle East risks because supply growth is strong and disruptions have been muted, while gold remains structurally bullish on central-bank demand and fiscal/tariff uncertainty. Copper and industrial metals may benefit from tariffs, defense spending, and electrification, while heat waves are tightening power markets.

Main Topics: Oil market reaction to Middle East conflict (Priority: 5/5): Oil briefly priced in a large geopolitical risk premium after the conflict escalation, but prices quickly faded as actual supply disruptions did not materialize and markets see limited probability of a major flow shock. Oil supply growth outpacing demand (Priority: 5/5): The base case is for oil prices to drift lower as global supply expands faster than demand, driven by OPEC+ unwinding cuts and non-OPEC producers raising output, with U.S. shale only modestly weaker. Gold’s structural bull case (Priority: 5/5): Gold remains the preferred hedge against geopolitical, fiscal, and tariff risks, supported by persistent central-bank accumulation and the possibility of private investors reallocating out of dollar assets. Tariffs and metals market dislocations (Priority: 4/5): Tariffs are already lifting U.S. steel and aluminum prices and could sharply tighten copper markets if higher duties are imposed, pulling inventories toward the U.S. and raising prices abroad. Heat waves and power-market stress (Priority: 4/5): Extreme summer weather is boosting electricity demand and straining supply, creating upside risk for U.S. power prices and potential outages, especially in tight regional markets. Defense spending and industrial metals (Priority: 3/5): Higher defense budgets in the U.S. and Europe should favor industrial metals such as copper and nickel, given their role in defense-related demand and electrification. China’s energy diversification and demand shift (Priority: 4/5): China is expected to continue diversifying away from imported oil and gas toward domestic power, coal, electrification, and green metals, which is bearish for hydrocarbons but supportive for copper.

Key Arguments: Oil’s geopolitical risk premium collapsed because markets have seen repeated shocks without sustained flow disruptions, and Iran’s response was muted. The probability of a major supply disruption appears low in options markets, below 4%, so traders are not pricing a lasting shock. The most important downside force for oil is strong supply growth, with global supply expected to grow about four times faster than demand. OPEC+ unwinding voluntary cuts and rising non-OPEC production are the main sources of that supply growth. U.S. shale may not fall as much as expected because producers hedged higher during the recent price spike, making supply more resilient. Gold’s bull case is structural rather than cyclical: central banks have increased buying to diversify away from dollar-based reserves. Gold could rise further if private investors follow central banks and shift even a small amount of savings out of dollar assets. Tariffs are already producing real metal-market effects, especially in steel and aluminum, and are likely to keep copper markets tight ahead of possible tariff changes. Heat waves raise energy demand and can disrupt refinery and power operations, making summer power markets vulnerable to spikes and outages. China’s oil demand is stagnating because growth is shifting from gasoline and diesel toward EVs, LNG trucks, and electrified transport, widening the gap between GDP growth and oil demand growth. Industrial metals benefit from lower rates, a weaker dollar, electrification, and higher defense spending more than oil does. If U.S. fiscal sustainability becomes a renewed market concern, gold is the primary beneficiary. The commodity with the clearest downside is oil; the clearest upside is gold, followed by U.S. copper.

Data Points: Geopolitical risk premium in oil: Over $15 per barrel - Estimated spike on Sunday night after Middle East escalation Oil risk premium after 24 hours: Only a couple of dollars per barrel - Premium fell quickly as prices returned near pre-escalation levels Probability of large supply disruption: Below 4% - Options markets implied low odds of major disruption Extreme oil upside if Iran supply drops sharply: Above $90 per barrel - Base-case tail scenario for crude prices Extreme oil upside if Strait of Hormuz is disrupted: Above $110 per barrel - Sustained disruption tail scenario Global oil demand growth: 600 kbd - Expected oil demand increase this year Global oil market demand growth: 0.6% - Oil demand growth as a share of the overall market Global power market demand growth: 4% to 5% - Demand growth expected to outpace oil demand China copper demand growth: Up 25% year to date - Supported by solar installations and electrification Oil demand-growth gap vs GDP: Around 2.5 percentage points - New normal gap between GDP growth and oil demand growth Gold price target: $4,000 per troy ounce - Goldman Sachs forecast implied about 20% upside from current levels Central bank gold buying: Fivefold increase since 2022 - Buying accelerated after Russia’s reserves were frozen Central bank survey response: No surveyed central bank planned to reduce gold holdings - Survey of more than 70 central banks U.S. steel tariff: 50% - Current tariff level on steel imports U.S. aluminum tariff: 50% - Current tariff level on aluminum imports Expected U.S. copper tariff: 25% - Base-case tariff assumption for copper imports Potential risk tariff on copper: 50% - Upside-risk scenario for copper imports Inventory tightness outside the U.S.: 10 days of consumption - Inventory levels in China and the rest of the world excluding the U.S. Defense-driven U.S. copper demand: About 5% - Share of U.S. copper demand attributed to defense industry Defense-driven U.S. nickel demand: 13% - Share of U.S. nickel demand attributed to defense industry

Pivotal Quotes: "we estimate that the geopolitical risk premium in oil spiked to over $15 per barrel" — Dan Stroyven: Explaining why oil briefly jumped after the Middle East escalation "our base case is 25%, with risk skewed towards a 50% tariff on copper" — Dan Stroyven: Describing why copper prices may rise due to tariff policy "We see the most upside for gold and for U.S. copper, and see the most downside for oil." — Dan Stroyven: His bottom-line relative value view across commodities

Implications: Listeners should expect continued divergence: oil may soften unless disruptions occur, while gold and copper look better positioned. Tariffs, fiscal stress, electrification, and defense spending are likely to reshape commodity leadership through year-end.