Slowing growth and geopolitical risks will weigh on oil and copper although gold will continue to benefit from safe haven demand, writes Heng Koon How, head of markets strategy at Singapore-based bank UOB.

Heng Koon How, head of markets strategy at UOB. Photo courtesy of the bank.

It has been a difficult and challenging year for major commodities across 2024. Brent crude oil peaked at around $90 per barrel in the second quarter and has since retreated to around $75 per barrel.

Copper – another barometer to the health of the world economy – peaked at just under $11,000 per metric tonne in the second quarter and has fallen in tandem to struggle at $9,000 per metric tonne level in December.

Gold, on the other hand, will continue to benefit from economic and geopolitical uncertainties, and continue its strong run next year.

Slowing growth from both China and the Eurozone have weighed on oil and copper prices

Both Brent crude oil and copper’s volatile price actions are symptomatic of an increasingly challenging backdrop for the global economy.

After the initial euphoria from the latest round of stimulus, investors have come to acknowledge that China’s economic recovery remains fraught with challenges. Much still needs to be done to restructure the massive debt overhang in the domestic property sector. Both consumer and investor confidence in China have yet to recover meaningfully, and as such, retail spending growth remains weak and the money supply continues to contract.

Adding further pressure to China’s weakening economy is the daunting prospect of even higher trade tariffs next year from the second Trump administration. As such, we have downgraded China’s GDP growth forecast next year by 0.3 percentage points to 4.3%. Realistically, it is becoming increasingly difficult for China to achieve its 5% growth target.

In Europe, the growth outlook is increasingly challenging too. Amid the Russia-Ukraine conflict, Eurozone countries now need to spend much more fiscally for their collective defence. This higher indebtedness is coming at a time when growth for both Germany and France, traditionally Eurozone’s twin industrial powerhouses, are now near borderline recessionary levels. Specifically, France’s sovereign rating has been cut recently due to the worsening budget and political crisis.

As such, it is no surprise that the European Central Bank (ECB) has been actively cutting rates, dropping its benchmark refinancing rate from 4.5% at the start of 2024 to 3.15% by December. 2025 is likely to be challenging for both France and Germany. In particular, Germany’s Federal Election in February 2025 has the potential to inject even more uncertainty into the economy.

Trade tariffs provide another overhang

For Brent crude oil, the historical dynamics among the key energy producers have now been overturned. The Organisation of Petroleum Exporting Countries (OPEC) is finding it increasingly difficult to stabilize crude oil prices and maintain market share. This is because they have increasingly ceded market share and pricing power to the U.S.

With a daily production of about 13.5 million barrels per day, the U.S. is now the world’s largest producer of crude oil. U.S. energy production has jumped over the past decade under the initial expansion from the first Trump administration and the follow up expansion by the Biden administration.

In contrast, forced to maintain its production cuts, Saudi Arabia’s crude oil production is now much lower at just 9 million barrels per day. In short, the U.S. now produces about 50% more crude oil each day than Saudi Arabia.

With slowing growth from both China and Eurozone, the outlook for global energy demand has been repeatedly downgraded by OPEC. As such, the threat of oversupply keeps Brent crude oil prices depressed. We see another challenging year for Brent crude oil around its current levels of $70 to $75 per barrel. In addition, we cannot rule out the risk of Brent crude oil falling below $70 should the second Trump administration ramp up both China and global tariffs significantly in 2025.

As for copper, it has lived up to its nickname of “Dr Copper” – which refers to the ability to use the commodity’s prices to predict the health of the economy. With prices struggling just under $9,000 per metric tonne by end-2024, “Dr Copper” is signaling more weakness and pain ahead for the global economy in 2025.

In particular, copper prices are very allergic to the fears of China’s economic slowdown. With China’s industrial activity yet to pick up meaningfully, stocks of copper on major exchanges worldwide have picked up. The cash spread for copper is at a large discount, implying weak immediate demand. As such, we have a negative outlook for copper and see it sliding further to $7,500 per metric tonne by end-2025.

Upside possible for Brent crude oil and copper in the medium to long term

It is important to note that while the short-term outlook for both Brent crude oil and copper are decidedly negative, the medium- to longer-term outlook may be entirely different. For Brent crude oil, the futures curve is mostly flat and there does not seem to be much risk premium priced in. This is despite the on-going conflicts and geopolitical risks across the Middle East. Any escalation in the region could crimp the supply of crude and send prices upwards.

As for copper, it is well acknowledged that over the medium term, there is an increasing risk of supply deficits. Lower supply from aging copper mines will fail to catch up with rising demand from the green transition and the increasing global adoption of electric vehicles. As such, price takers and consumers of both Brent crude oil and copper may take advantage of the lower current prices to hedge their future needs.

Gold to continue its rally on safe haven demand

However, one particular commodity is benefitting strongly from economic and geopolitical uncertainties. Gold has had a very strong year for 2024, rallying by about one-third from $2,000 per ounce in January to the current level at around $2,600 per ounce. From a longer-term perspective, the positive drivers remain intact – including on-going Emerging Market and Asian central bank allocation into gold, and strong physical gold and jewellery demand from the retail sector.

There is a common thread running through the rising demand from central banks and the retail sector. Both are driven by the need to diversify away from rising geopolitical concerns and uncertainties around the US dollar, ahead of disruptive trade and fiscal policies from the second Trump term.

We remain confident of our positive view for gold as long-term safe haven demand needs will likely stay strong amid a further rise in geopolitical and economic risks from Trump 2.0. We see gold rising further to eventually $3,000 per ounce by the end of 2025. Immediate strength in the US dollar may trigger some near term consolidation in gold before it resumes its rally as 2025 progresses.

The year ahead will bring differing fates for Brent crude oil, copper and gold.

Both Brent crude oil and copper will likely be weighed down by the worsening economic growth outlook for China and Europe. Concerns over the disruptive impact from higher trade tariffs under the second Trump administration will also be negative for these two commodities. This is despite the generally constructive outlook for the U.S. economy.

However, gold will likely benefit from the uncertainty and continue its strong rally across 2025.