From geopolitics to rate cuts: What’s shaping commodities markets?

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Greg Shearer: Welcome to ‘Research Recap’ on J.P. Morgan's Making Sense. My name is Greg Shearer, head of Base and Precious Metals Research here at J.P. Morgan. In today's episode, we'll be exploring the key factors currently influencing global oil demand, the impact of recent Ukrainian attacks on Russian oil infrastructure and how FED rate-cutting cycles historically affect oil prices and broader commodities returns. We'll also compare oil's performance to the other commodities such as metals and discuss how a potential resurgence in inflation could shape the outlook for energy markets. Joining me for today's conversation is my colleague, Natasha Kaneva, head of Global Commodities Research. Natasha, thank you for joining me today.

Natasha Kaneva: Greg, thank you for having me.

Greg Shearer: So I think it makes sense to start on oil and let's specifically focus on the demand side. Natasha, what are the key factors currently influencing global oil demand in your opinion?

Natasha Kaneva: Well, thank you, Greg. So first of all, what I would like to point out, and we have been sending this message for, you know, a couple years already now, is that we absolutely see no signs on demand slowing down structurally. So there are no signs of recession whatsoever in any of the regions that we're following. There's definitely some seasonality, no demand presence. So for example, travel activity began to ease with the close of the summer travel season. So for example, if you take a look at the TSA data in the United States, weekly air passenger throughput has climbed for 12 straight weeks compared to last year. However, in September, total volume indicates only a modest, like just a little bit 0.2% increase, which is a notable slowdown from the 1% growth seen in the previous two months. Likewise, U.S. gasoline demand that started to pull back a little bit, which is mirroring the broader moderation in travel trends. Yes, but again, this is something that happens seasonally. Every single summer kids are back in school, people are back at work, and we see some slowdown there. So everything that we're observing globally, actually it's pointing out a very strong demand trend. So for example, if we take a look at the flying activity, both numbers coming out of China, Asia more broadly, but Europe and Middle East as well, very strong numbers maintaining about just slightly under 3% increase over the last year's levels. Similarly, when we take a look at the port activities, Boston, United States, and in China, the numbers actually very, very supportive for the demand numbers. So Greg, in the case of metals, I know that you just came back from a big industry event in Europe. What can you give us in terms of feedback for the demand regionally and globally?

Greg Shearer: It's really interesting. So I think let's start in China, because obviously with its metal markets is so central to developing the narrative around global demand. You're talking about a region that accounts for 50% plus across all the base metals that we look at, and that's been a really interesting dynamic so far this year because demand in the first half of the year in China was exceptional. We were seeing copper demand at 8% growth in the first half. Aluminum demand, which is always slightly lower, a little bit more depressed, but still at a very punchy 4%-ish growth coming in in the first half. Then you get around to mid-year and, and kind of what was driving that in China was a bit of front loading in terms of what we've seen ahead of tariff uncertainty. But also front loading of domestic demand because of some policy changes that we've seen around things like their solar build out policy regime. And we are seeing China visibly downshift into the second half of this year. But relative to our expectations, still staying quite firm. And I think it's gonna be quite interesting in a metal like copper where we've just seen some supply disruptions and prices higher is really how much underlying strength do we still have for Chinese demand as we go through the end of the year at higher prices. Other than that, I'd say regionally, one interesting dynamic is U.S. demand seems to be holding in there despite 50% tariffs on aluminum and copper so far. We're not really significantly hearing reports of a significant let up there. And then in Europe, it's pretty subdued. I was at an aluminum conference that you were referencing and the mood was still pretty gloomy. It's not getting worse, but it's still not getting too, too much better. There's a little bit of bright spots in construction. But beyond that, there's still a lot of uncertainty as we look forward, even with broader fiscal and defense spending coming out of Germany. I think going back to oil on your side, Natasha, demand is one thing, but obviously, you know, the market is made of, of both supply and demand. And we've had lots of geopolitical events that have led to volatility on that front. If we look specifically at Russia-Ukraine, have recent Ukrainian attacks on Russian oil infrastructure, how have they really impacted the global oil supply and also the feed through into the price side?

Natasha Kaneva: Yes, definitely this is the focus from our team for sure and from the market as well. So I think what is fair to mention is that Ukraine has intensified its attack on Russian energy infrastructure since pretty much May of this year. So for example, in August we had at least 16 reported attacks. In September so far with September 25th, we already have certain reported attacks. What is also important to keep in mind is that the type of those attacks has changed, which in our view actually signals a strategic shift in Ukraine's approach to targeting Russian infrastructure, which by the way can have a very significant implication for global energy markets. So couple things. Previously, Ukrainian attacks were targeting only Russian refined infrastructure. Why that was the case? Because Russian refining services the domestic market. There were no attacks in 2024 and pretty much through the first half of the year, well, pretty much through September actually, there were no attacks on the Russian port infrastructure. Why that was the case? Because that services export markets and would have a big impact on prices. So two weeks ago we had the first attack on the Russian Port Primorsk, that's one of the largest ports. This week we had another attack. So that's number one. Number two, what is becoming more and more visible is that the same refiners, the same infrastructure, the same pipelines are being hit over, and over, and over, and over again and now it takes significantly longer time for the Russian infrastructure, for the Russian refining capacity to restart. So last year we said it's, you know, a couple weeks and they're done. This time we see that it's, it's actually takes much longer. So because of that, there's a very, very visible step down in Russian refining output. It's down about 600 KBD. This is a really chunky number. Uh, we absolutely see this in the Russian market. If you take a look at the Russian diesel prices, gasoline prices, they're absolutely at record levels. We're still not hearing much about, you know, shortages or big lines on just availability, but the prices are, you know, definitely there, which is pushing inflation higher. Also interesting development that took yesterday. So it's, President Zelensky in an interview with Axios stated that Ukraine, uh, has President Trump's explicit backing to target Russian assets including energy infrastructure and arms factories. He added also that was additional long-range weaponry from the United States, Ukraine tends to get these capabilities to use. So which means we are just at the start of that. And so, last week we actually pointed out for the first time since the start of the Russia-Ukraine wars that there is a probability that Russia would have to shut down some part of its supplies, its production just because they cannot refine it. They have issues at the port capacity and the short storage capacity as well.

Greg Shearer: Yeah, really interesting. So a bit of a, a sea change there. Are you seeing any sort of premium being priced in above a fair value?

Natasha Kaneva: That's a great question. So we estimate that at the moment the geopolitical premium because of the Russia-Ukraine is probably closer to $3 to the price. And then we have been, um, stressing with the market to pay attention to the so-called storage premium. Um, the fact is that majority of the buildup in the global oil market is actually now emerging in China rather than in the visible OECD inventories where the price formation happens.

Greg Shearer: Yeah, really, really interesting stuff and I think a good segue in terms of that transition into a new sort of era into what also we want to talk about, which is FED rate-cutting cycle, right? So after about a year after they first began to lower rates in September 2024, we got a 25-basis-point cut in September. How do you, looking at the data, historically think that rate-cutting cycles from the FED affect oil prices and also the broader commodities complex returns?

Natasha Kaneva: Well, yes, so the FED cutting cycle has begun. So I think the main question now is what lies ahead. So if we take a look at the consensus, the consensus forecast calls for four or five more quarter point reductions over the next 12 months. A view which is, you know, reflected in the U.S. financial assets that are currently pricing in a Goldilocks scenario. It's one where the growth and inflation moderate just enough to permit for more accommodative monetary policy but not so much as to trigger recession. So the optimism is evident in S&P 500 reaching new highs every single day, yes. And commodity prices are what? Up about what? 7% since bottoming out in mid-August. And the 10-year U.S. Treasury yield is dropping to around 4%, testing its lowest since Liberation Day in April. So our economists overall are looking for three more cuts. So again, you know, pretty straightforward consensus expectations, but again, what we have been pointing out is that the background behind the FED cutting cycle matters massively. Yeah. So if there's a benign cycle, then commodities historically perform really well. If the FED is cutting because there is a recession, as you'll see completely different performance. So overall, the scenario where global expansion bends but does not break its market by using inflation and subdued job growth. So we titled that type of a scenario Bronzeilocks, yes, instead of Goldilocks just because of the subdued job growth. So how the commodities performed during those type of scenarios really, really well. Yes. So they averaging about 15% return over the next nine months. We don't have many examples of that scenario. It's 1995, 2024. Recession risk, however, remains elevated. So our economists pointing that there is about 40% risk that there will be a recession over the next 12 months in the United States. Commodities, you know, very understandably have averaged about 16% negative return over the following six to nine months in those scenarios. So everybody, everybody remembers, you know, 2001 recession, 2009, and even 1998. And then, you know, the third scenario that we are taking a very close look, especially now that inflation is rising, is that what if inflation or there's a renewed inflation and our economists actually apply about 45% probability that this will be the case. We can see that inflation metrics, no matter how you slice them, whether you look at the core, or headline PC, super core had, you know, all those inflation indicators already above the FED target and inflation might prove to be very, very sticky going into 2026. By all means, the FED will be less accommodative under those scenarios, but at the same time commodities actually tend to perform really well, yes, in those, in those conditions returning about, between 1.5% to 2%, monthly returns if we take a look over the next nine months. Greg, the question for you I wanted to ask you, because when we took a closer look at the data, what was really interesting to me, and I'm actually getting a lot of questions about that, is sectorially actually under the scenario of Bronzeilocks. Yes, a benign FED cutting cycle commodities perform really well, but this performance is being driven by energy and precious metals. Base metals, however, don't perform well under those scenarios. How would you explain that?

Greg Shearer: Yeah, it's a really fascinating dynamic. I mean, just to kind of go into a bit more detail, when we were looking at this data across all these different cycles, particularly when we kind of take even copper out of the base metals, look at some of the more, what we would think of less financialized base metals like aluminum, zinc. The consistency of the negative performance that we saw over the first six to nine months after the FED really begins cutting was actually really striking for me. And what we saw into your point, right, even over those benign cutting cycles, 1995, even in 2024 we saw base metals really significantly underperformed the rest of the sector. What we really begin to kind of pull back is on one hand there is an element of underperforming over those recessionary dynamics, right? Base metals, extremely cyclical, very levered to a manufacturing cycle. And when you look at some of those past recessions, some of those were actually, you know, caused or heightened by elevated energy prices and oil prices, right? So what you saw was actually energy performance reacting to some of the supply and demand fundamentals that were actually quite tight in those markets because of, you know, disruptions. Whereas base metals, it was all net negative, right? Higher energy prices leading to reduced, you know, consumption and manufacturing and really significantly weighing on the sector. What I guess, you know, another thing that really stuck out from our perspective was also primarily around what is happening on the Chinese cycle, right? Because the only really significantly bullish cycle that stands out for base metals was after the 2007 cutting cycle where you had an explosion higher. I mean, you did have that in energy as well, but in base metals in particular because of the counter cyclical Chinese stimulus that really significantly tightened up these markets led to a massive surge across the prices. Before eventually the global financial crisis and the demand consequences on the other hand led to significant sell offs further down the road. But you know, from my perspective, it really points to this tie-in that, that manufacturing feed-through that we're picking up in base metals is mainly a bit slower to respond to these FED cutting cycles and then a bit of an amplified downside when we do reach that more recessionary environment.

Natasha Kaneva: Very interesting, Greg. What about precious metals and the gold performance in those cycles?

Greg Shearer: Yeah, it's really interesting, Natasha. So what we see is precious metals, gold in particular, basically the polar opposite to what I was describing on the base metal side in that is we both see very strong consistency in terms of positive performance. If we look at the BCOM precious metals index, it's posted positive returns over the nine months following in basically all but one of the last seven FED cutting cycles. And when we look at gold in particular, that average return nine months later is about 8.4% higher. And what we kind of pull out from that is, particularly since the early 2000s, we have seen a very strong linkage between real yields and investment demand for gold. And that is an inverse relationship in that falling real yields drives inflows into gold ETFs and other gold investment vehicles because of the opportunity costs between yieldless gold and yields-bearing Treasury notes. And so from our perspective, it is really one of the most consistent performers. And I think when you're thinking about those scenarios that you're talking about, yes, we think the most outperformance in gold would come under that recessionary more hard landing scenario where you see bigger FED cuts, steeper drops in real yields. But another interesting dynamic that was pulled out from our analysis is that gold in that reflationary environment still does really well, right? You're maybe getting some headwinds because you're not getting as aggressive of a cutting cycle as you would under some other scenarios. But the focus shifts back to inflation and with some of the broader dynamics that we're talking about. Whether it's pure reflationary, is it stagflationary, is there thoughts about the, the FED's third mandate in terms of longer term interest rates being low and modest? And from that perspective, we think gold actually could perform very well under that reflationary dynamic as that really clean, easy-to-own real asset.

Natasha Kaneva: Thank you, Greg.

Greg Shearer: Following back up on oil, if we think about inflation and if we think about that reflationary environment, Natasha, if inflation makes a comeback, how do you really think that might influence oil prices in the coming months?

Natasha Kaneva: Well yes, that's absolutely the right question to ask. So traditionally, reflationary scenarios have been very, very positive for commodities and the cycle was driven by energy prices. This time around, however, we believe this is not the cycle. So already in 2023 we concluded that the very high prices in '21 and '22 in the case of oil did exactly what they're supposed to do, incentivize a lot of supply. And we believe that all of that supply will come in 2025 and we'll see $6 handle in the Brent price. So it's happened a bit faster than we expected, but nevertheless, prices, uh, down about $10 today or this year, year-to-date, versus uh, versus 2024. So however, as you pointed out earlier when you asked me is that while we averaged our price forecast in the first half of the year, in the third quarter we're off by about $5. So we believe that $3 of that is the storage premium because majority of the inventory built is ending up in China outside of the price formation regions of the OECD. And the same time right now experiencing about $2 risk premium because of the Ukraine attacks on Russian infrastructure. But when we look in 2026 and just pure supply demand picture, what our price forecasts are based on, it is a $60 oil. So demand is absolutely fine, but there is a lot of supply and all of that will become visible next year. Having said that, the questions to ask is, number one, will China continue buying at the pace that they're buying? If indeed that's the case, then our prices are about $8 too low. Question number two, what will happen with the Russia-Ukraine war and whether there will be resolution or there will be more and more attack and escalating attack on Russian infrastructure, you know, towards the end of this year and going into 2026.

Greg Shearer: Thank you, Natasha. I think that's a good place for us to wrap up. I really appreciate you joining us and sharing your insights. And to our listeners, thank you so much for tuning in to this episode of ‘Research Recap’ on J.P. Morgan's Making Sense. Be sure to tune in later this week for our upcoming episode where Mike Feroli, Chief U.S. Economist, will be discussing the monthly jobs report. That episode will be available on Friday, October 3rd. Thanks again for listening, we'll see you next time.

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