Conviction to Commodities Despite Their Volatility

08/06/2026

Part One: The Short Cycle

Commodity markets in the current environment are generating a level of short-cycle volatility that has little precedent in recent history outside of acute crisis periods. In energy, the principal cause is well understood: a major geopolitical disruption to one of the world's most consequential shipping arteries, compounded by the near-impossibility of modelling the negotiating behaviour of the protagonists involved. In industrial metals, the drivers are different in character but convergent in effect: the interplay of Chinese demand signals, supply uncertainty across both quality and quantity, dollar dynamics, tariff risk, and financial positioning has produced price action that bears little resemblance to the market conditions of recent years. Both instruments have, within the space of months, moved from relatively tractable trading environments to something that looks and behaves like a different contract entirely.

The energy market's pricing problem is structural as much as it is informational. With equity indices dominated by technology and AI positioning, the imperative to discount tail outcomes in energy or transition metals is largely absent - capital markets are broadly seeking to look past current disruption rather than price it. Geopolitical risk in the Gulf has not transmitted cleanly through the risk-on/risk-off signals that typically drive institutional reallocation. Instead the pattern has been one of ceasefire rumours, escalation headlines, diplomatic statements whose meaning shifts within hours, and defensive exchanges that have thus far not invalidated the prevailing ceasefire (7th June has seen further escalation). The result is a market that oscillates violently around a mean it cannot locate, because the distribution of outcomes is genuinely wide and the inputs are genuinely unmodelable. Philippe Khoury, ADNOC's Executive Vice President for Sales and Trading, recently observed that he sees a disconnect between physical molecules and the financial markets trading them. It is a precise description of the structural problem the current environment presents.

The forward curve in crude oil reveals more about the limits of market interpretation than it does about the likely path of disruption. A pronounced backwardation has persisted through the period of disruption, with near-month contracts trading at a material premium to deferred positions. The instinct is to read this as the market pricing a supply shock - and it is, but only in the near term, with an expectation of future normalisation built in. Backwardation is structurally a resolution signal. A market that genuinely believed disruption would extend for six months or more would produce a flattening, as deferred contracts were bid upward toward the front. Paradoxically, the same flattening would occur as the disruption resolved, as the front fell back toward a mild contango. The curve shape that would indicate the market taking sustained disruption seriously is, on the surface, indistinguishable from the curve shape of a market growing less concerned. It is a distinction the curve alone cannot communicate cleanly, and it is one reason the current price structure resists straightforward interpretation - especially when taken together with the previously noted issues with absolute pricing of hydrocarbons.

Copper tells a related but distinct story. Where energy's short-cycle volatility is event-driven and episodic, copper's price action over the same period has been characterised by a more sustained structural ascent followed by a consolidation that tests conviction through attrition rather than shock. The daily bar width in LME copper during the period of peak volatility is significantly narrower than in Brent, but the cumulative drawdown from peak to trough is comparable in its effect on position holders.

The mechanisms of wash-out may differ, but for a position holder measuring the experience in drawdown rather than volatility, the distinction offers little comfort.

Underlying both markets is a further dynamic that tends to suppress the pricing of sustained disruption: the demonstrated willingness of policy authorities to deploy available backstops when physical stress becomes acute. The temporary relaxation of sanctions on Russian crude supply during the period of Hormuz disruption was one such intervention. It did not resolve the underlying problem, but it reinforced the market's working assumption that extreme outcomes will attract policy responses capable of softening them. That assumption is not irrational, and other examples of potential intervention are easy to identify. Of primary concern in this context is the resulting institutional disbelief in the very tail risks that the long-cycle structural argument suggests are not tails at all.

Part Two: The Long Cycle

The short-cycle volatility described above is not occurring in isolation. It is unfolding against a backdrop of longer-term structural decline that has been developing for years - and one could argue that this is precisely the origin of concern that has driven some of the more dramatic policy initiatives characterising President Trump's second term in office. To acknowledge those structural issues is not to advocate for the solutions pursued. The underlying condition is now, however, sufficiently advanced to be visible in the data of mainstream institutions, even if their published conclusions have been slow to reflect it.

The demand argument has undergone a quiet but significant revision. The dominant narrative of the past several years held that peak oil demand was imminent, that the energy transition would structurally erode consumption, and that investment in new production capacity was therefore not only unnecessary but potentially value-destructive. That narrative has not been formally abandoned, but it has been materially qualified. The IEA's World Energy Outlook 2025 reintroduced a Current Policies scenario showing no peak in demand before 2050. The significance of that reintroduction lies in what it concedes: that the actual trajectory of global energy policy, rather than its stated ambitions, produces a demand profile that the supply picture described below would struggle to meet.

The supply picture is itself worth examining carefully. Global oil production is concentrated in a small number of producers, the majority of them OPEC+ members, who account for the overwhelming majority of global supply. Alongside them, a larger number of smaller producers contribute meaningfully to aggregate output but are, as a group, operating fields in persistent decline at increasing cost. The combination of concentrated control and broad-based depletion is a supply picture that the investment narrative of the past decade has consistently underweighted.

Where previously US tight oil had been expected to provide a reliable supply response, that assumption is now under genuine scrutiny. The maturation of the most productive acreage, rising water cuts, and the capital discipline imposed by investors on US operators have introduced meaningful uncertainty about whether tight oil can continue to serve as the marginal supplier of choice at the scale the market has assumed.

Copper and the broader industrial metals complex present a structurally analogous argument with a different demand driver. Where oil's long-cycle case requires navigating the uncertainty of transition trajectories, copper's does not. Demand for copper is supported by electrification regardless of how the energy transition unfolds: more renewables require copper, more electric vehicles require copper, more grid infrastructure requires copper. The demand side of the long-cycle argument is, in this respect, more legible for copper than for oil. The supply side is equally constrained. Ore grades at existing mines have been declining for decades.

The lead time from discovery to production for a major copper project now routinely exceeds fifteen years. The pipeline of projects capable of meeting incremental demand at the scale required is insufficient. The long-cycle bull case for copper does not depend on a particular view of oil demand, geopolitical risk, or transition policy. It depends only on the arithmetic of supply and the direction of electrification.

Taken together, these two markets are pointing toward the same structural conclusion through different routes. The world is likely to need very significant quantities of both oil and copper for longer than the consensus investment narrative of the past decade has assumed. The supply infrastructure required to meet that need is not being built at the necessary rate. The long-cycle thesis is no longer a contrarian position. It is becoming the default assumption of serious energy and metals analysis, even where that assumption sits uncomfortably alongside stated policy commitments.

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