Commodities delivered strong headline returns in 2025, but the gains were far from uniform. Precious metals surged by roughly 80%, while the rest of the Bloomberg Commodity Index lagged cash by more than 3%.
Less than two months into the new year, the rally appears to be broadening beyond precious metals into energy and industrial metals. Although it is early, commodities are known for supercycles—multi-year or even decade-long expansions driven by structural forces—prompting a closer look at what might be driving this shift. The oil futures curve offers useful insight.
The accompanying chart tracks two Brent crude futures spreads over the past two decades. The first measures the price difference between the front-month contract and the contract one year forward. When this spread is positive—meaning near-term prices exceed those further out—it typically signals immediate supply tightness or excess demand. The second compares the one-year contract with the three-year contract, providing a window into longer-term supply-demand expectations.
For most of the past twenty years, these short- and long-term spreads have moved in tandem, reflecting consistent market expectations across time horizons. A notable divergence emerged in 2006–07, near the end of the previous commodity supercycle. At that time, strong long-term demand expectations—largely driven by China—supported deferred prices even as near-term fundamentals appeared less constrained.
Today presents a different divergence—essentially the reverse of 2006–07. Short-term spreads signal tight conditions in the immediate market, while longer-term spreads suggest limited concern about supply beyond the next year.
What explains the near-term tightness? Part of it may reflect precautionary stockpiling amid heightened geopolitical risks and potential supply-chain disruptions. More fundamentally, the evolving structure of globalisation—characterised by greater fragmentation—may be reshaping commodity markets. As nations prioritise resource security, reshore production, and reduce strategic dependencies, competition for key inputs intensifies. This environment can elevate risk premiums, supporting higher prices in the near term even as longer-term supply expectations remain relatively anchored.
Whether this dynamic persists warrants close attention. If sustained, commodities—particularly critical minerals, gold, and energy—could carry structurally higher risk premiums than in prior decades.
Note: Excerpts taken from Vanguard’s ‘Smart Investing’
Rick Maggi CFP, Financial Adviser (Perth, Westmount Financial)
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