We are in yet another very significant week, with many events that will impact the movement of commodity markets in the short and long term. In such periods, it is always best to hold commodities. Key events this week: the lunar new year begins in China (which will affect market activities), we await political decisions from the central banks of the U.S., Brazil, Canada, and the ECB, the latest GDP data from the U.S. will be released, as well as data on PCE inflation in the U.S.
Due to all this, the market will focus on cash markets, the direction of the dollar, Argentine export taxes, and potential U.S. tariffs. With Trump coming to power, in these early days of his second term, it all boils down to the question of tariffs: who, when, and how much? And then we should expect some response from the opposing side. In any case, it is interesting, and we will see how painful it will be and for whom in the end. Goods could soon become the foundation of a new financial order.
At the beginning of the new week, it seems that everything is generally losing value. From stock markets to major cryptocurrencies, energy, commodities, and evidently also all agricultural products. Only the VIX, the volatility index, is rising. It is a thermometer of fear, geopolitical instability. Something is brewing. Are we entering a bullish trend? Bloomberg’s Commodity Index (BCI), an index consisting of a basket of market prices of various commodities, historically strengthens in February, which traders certainly have in their subconscious.
Chinese authorities have indicated that, as part of the government strategy to attract long-term financing for the equity sector, hundreds of billions of yuan of fresh capital from state insurance will be injected annually. The first pilot project will be launched in the first half of the year. This news has triggered a rise in Chinese and other Asian stock markets. This is a classic example of loss of purchasing power: I print more, devalue money, and even debt, consequently raising the prices of substitutable assets, such as companies. Everyone wins, and savers lose. Concurrently, the dollar is hovering around the level of 1.05 against the euro, which is a factor that generally affects the decline in European commodity prices.
The dollar-centric system, as structured since 1971, will dismantle itself and collapse in on itself. However, paradoxically, the collapse will be characterized by a rise in the dollar and interest rates. The main reason why all this is happening is three very powerful forces that influence the global economy, and these three forces have never before developed in unison in history.
There has been the largest expansion of global government debt in the last 100 years, and this time it is focused on the West, rather than emerging markets, as has always been the case over the last 60 years. The era of cheap energy, especially oil and raw materials in general, has come to an end. We are not running out of raw materials, but we have run out of cheap raw materials. And then, the third key point is that technology imposes a deflationary, nonlinear force on an increasing part of the global economy.
Falling Oil Prices
On global markets, oil prices fell significantly last week, for the first time this year and after four consecutive weeks of price increases, as the U.S. president requested OPEC to lower prices while simultaneously announcing an increase in oil production in the U.S. After such a request, a price drop is the only logical sequence of events.
The price of Brent crude fell by 2.8 percent last week, while the price of WTI crude fell by 4.1 percent. In his address to participants at the World Economic Forum in Davos, Trump stated that he had asked OPEC members to lower oil prices to harm Russian finances and thus pressure Russia to start peace negotiations. Previously, Trump had stated that his goal was to increase domestic oil production, along with expedited permitting for new projects.
OPEC has been reducing production for years due to weak demand following the pandemic, but this cartel has recently announced an increase in production, although now the question is, given the market situation and Trump’s messages, whether they will actually do so. In such circumstances, the International Energy Agency estimates that oil supply in 2025 will increase by 1.9 million barrels per day, even if OPEC and its allies delay production increases until 2026, as independent producers led by the U.S. will increase production.
Futures prices for European natural gas TTF fell below €48/MWh as temperatures above normal reduced heating demand, although a cooler shift is expected later this week. Strong renewable energy production further reduced gas demand in the energy sector. Meanwhile, supply disruptions in Norway, including the shutdown of the Troll gas field, provided some support for prices. In the meantime, the European Commission plans to continue talks with Ukraine, Hungary, and Slovakia to ensure gas supply through the Ukrainian pipeline system, following the disruption of Russian gas transit on January 1. Slovakia and Hungary have called on the EU to intervene to restore flows.
Sales Pressure on Wheat
In the agri world, the “market drivers” were the weakness of the dollar and unfavorable weather in South America, where rains are slowing soybean harvests in Brazil and drought in Argentina is reducing corn and soybean production estimates. The grain market in the EU ended last week in decline. Grains and oilseeds are falling together in the context of the euro’s recovery and the drop in crude oil prices. But most of all, prices fell due to profit-taking by market participants.
As in Chicago, on Friday, the sales pressure on wheat was strongest on Euronext. Prices on the March 2025 contract are returning to test support at €225-226/t, the lowest level in over a week. The export problem to non-EU countries remains in focus, while shipments in French ports are stalled. Besides competition from Black Sea origins, the reduction of export taxes announced by the Argentine government is worrying wheat exporters from the EU.
As for the EU, imports of both soybeans, meal, and corn are currently stronger than last season, while wheat exports are significantly weaker than at the same time last season. It seems that Trump will not neglect biofuels in this term, but that his administration is studying measures to produce and sell more biofuels. Certainly a positive signal for global soybean prices.
One should definitely keep an eye on the very large long position that corn has on CBOT. We are heading towards record levels, and if liquidation of that position occurs at some point, it will be very painful for all those who have been blowing into bullish sails. In soybeans, that long position is around 5.9 million tons, which does not represent a significant risk. On the other hand, positions in wheat are short, both on CBOT and MATIF, and the question is whether it makes sense to further build that short position under current conditions.
Copper futures fell to around $4.2/lbs at the start of the new week, as market sentiment was dampened by U.S. President Donald Trump’s threat to impose tariffs and sanctions on Colombia. This occurred after Colombia blocked two U.S. military aircraft transporting deported migrants as part of an ongoing crackdown on illegal immigration. The decline was also fueled by disappointing economic data, with manufacturing activity in China, a major copper consumer, unexpectedly decreasing, and growth in the services sector sharply slowing.
Additionally, caution prevailed ahead of the Chinese one-week Lunar New Year holiday. Meanwhile, Freeport-McMoRan, a major copper producer, reported last week that it missed its production targets for the fourth quarter and warned of a significant drop in production in the first quarter.
