Commodities: seeking shelter from the tariff tornado

The US administration sees its raison d'etre as leveling unfair trade terms responsible for draining US wealth into foreign countries, removing high-paying working-class jobs, and disadvantaging the middle class.

President Trump has more than three decades of consistent messages around the harm that unfair trade terms create for US workers, and he is wasting no time getting the changes started before the midterm elections in two years. (1)

Is Trump’s view justified?

In 2003, Warren Buffett, the CEO of Berkshire Hathaway, offered a simplified explanation of global trade's economic effects, raising concerns about the lack of balanced trade. (2) It is well worth the time to read. In a textbook example of comparative advantage, one country trades a good with a productive advantage to another country in exchange for a product in which they have an advantage.

The US sends cereal to Italy in return for wine; for example, both countries benefit, and the living standards of both rise. But what happens when the US buys wine and cereal from Italy and, instead of trading a product, it offers only its wealth in exchange?

When writ large, the US depletes its wealth by sending capital outside the country and increasing its debt. US assets are used to grow the Italian economy and improve the standard of living of Italian citizens. In the US, the draining of assets can increase debt levels, lower the value of the US dollar, raise income inequities among citizens, and increase the cost of living. Eventually, the electorate will be economically unhappy and vote for politicians who promise to make better trade deals.

Which tools will the administration rely on for change?

Tariffs offer one way for the executive branch to effect change quickly.

Broad tariff threats like those offered against Canada and Mexico immediately garnered attention, and policy changes were announced within 24 hours on issues like cross-border flows of guns, drugs, and illegal immigration.

The next phase will likely involve the US issuing reciprocal tariffs to combat disadvantages to US products, such as the 10% tariffs on US autos imported into Europe, a UK value-added tax that disadvantages imports, or Ireland's unequal tax haven status. The World Trade Organization's data shows the US has one of the lowest average tariff rates of major trading partners. (3)

In a recent New York Times opinion article, Robert Lighthizer, former Trump US Trade Representative, argues tariffs are one tool in a range of tools, including government subsidies, market access limits, skewed health and safety standards, and directed banking systems that lend at below market rates to manufacturers, labor laws that keep wages low, currency manipulation, predatory tax systems, lack of essential regulation in areas like the environment. (4) We expect these inequities to be a target of the administration.

Current state of the commodity markets

Oil

Oil demand is strong, continuing to expand at the same growth rate of the last 35 years (roughly +1.5% yearly). It has even made up for the volume declines during the pandemic lockdowns to return to pre-pandemic trend.(5)

US supply is unlikely to expand for a host of reasons. Higher costs for material, labor, services, and capital provide headwinds. Still, the key factor preventing supply expansion comes from senior management of oil and gas companies, where compensation is now based on profit, not production. The compensation change marks a transformation from the first Trump term when "drill, baby, drill" flooded the market with product supply regardless of price. (6)

Furthermore, we don't see a Russia-Ukraine peace agreement as dramatically changing the Russian oil supply to the market. The prior administration allowed Russian fuel to ship to China and India in opposition to the stated sanctions as it helped lower US fuel prices, but little supply was disrupted. The only meaningful drop in Russian oil supply occurred in January 2025 when the prior administration sanctioned tankers carrying Russian oil. (7) Tanker sanctions proved effective, but at only a month long, they were in effect for too short a time to be dramatic.

Natural gas

Natural gas is recovering after the US experienced its warmest winter in history during 2023–24, driving natural gas prices to the lowest average annual price when adjusted for inflation. (8), (9)

Europe may be in an emerging energy crisis that we have monitored for several years. Europe relied on cheap energy via Russian natural gas to offset costly labor to remain globally competitive. The destruction of NordStream I and II in 2022 reduced the supply, and the saving grace of low demand during very mild winters over the last three years has prevented a crisis from emerging before now.

As of January 1, three of the four pipeline systems bringing Russian natural gas into Europe are shut off, leaving only the Turkstream pipeline through Turkey but with limited capacity. (10) However, a Russia-Ukraine peace agreement may meaningfully change European natural gas prices, not US prices. European natural gas averaged 17 Euros per megawatt (MWh) in the five years before 2020, and current prices are 51 Euros/ MWh. (11)

Precious metals

Precious metals remain buoyed by a multi-year trend of strong, consistent central bank purchases of gold and increasing investor attention to silver. There is a narrative in the market that US tariffs may potentially apply to gold if blanket tariffs are imposed, causing some degree of investor interest in the futures and options markets. We are not in the camp that believes tariffs would apply to US gold imports, as it does not serve any advantage. Central bank purchases, which have been very strong over the last three years as a diversifier of risk in the event of tariffs and sanctions, are unlikely to stop now that the tariffs and sanctions are being put in place.

Industrial metals

Industrial metals, typically a China economic growth story, are supported by increasing demand for copper in China, where electrification is in full swing. EV demand drives increased copper use, and solar panel production growth drives silver use. Additionally, the threat of tariffs is tangible in the industrial metal space, as aluminum imports to the US were under a 10% tariff, now increased to 25% with several exclusions removed, contributing to a local price rise in the US. (12) An announced $500 billion AI investment will be particularly copper-intensive for data center infrastructure and energy needs. It is not inconceivable that copper could see tariff attention.

Agricultural

Agricultural grain prices are digesting the switch from El Niño to La Niña, which has resulted in dramatically higher grain prices in three of the last four occurrences. (13) The change in Pacific Ocean temperatures that define El Niño and La Niña often create drought conditions in the US and parts of South America, hampering crop production.

Agricultural soft commodity prices have dramatically increased over the last year as tropical growth regions in Columbia, Brazil, and Vietnam all experienced droughts that caused dramatic shortages of coffee even as coffee demand returned to pre-Covid highs. Pre-pandemic prices for coffee were approximately $1.00 per pound and recently hit $4.35 per pound. (14) Suppliers have seen emerging market consumers reject those prices, and some developed market consumers are doing the same. (15)

Platinum and palladium

Platinum and palladium are gaining more attention as automakers reverse commitments to all-electric vehicles (EVs) in favor of more popular hybrid power trains or outright return to internal combustion engine (ICE) powered vehicles.

Porsche is the latest to announce significant capital expenditure spending to expand ICE and hybrid offerings at the expense of pure battery models. (16)

Platinum and palladium have had weak prices in recent years despite tight supplies as industrial consumers drew down above-ground stockpiles.

In Western countries, EV affordability and charger access are limiting consumer uptake. These issues do not exist in China, where EVs are technologically superior, significantly cheaper to buy and charge, and chargers are plentiful despite significant consumer EV purchases.

Final thoughts

One way to potentially reduce volatility in a commodity portfolio is to purchase futures further out on the commodity curve. Commodity portfolios typically purchase one to three-month futures contracts, but buying four to six-month contracts can potentially avoid a degree of price volatility. If a pipeline explodes, it disrupts supply until it is repaired, in most cases in a week or two. Prices in the front-month contract could spike higher on the drop in supply, but longer-dated contracts may not move at all because supply will not be disrupted that far into the future. The same may be said about a dynamic tariff environment where tariffs are large enough to cause price movements either up or down over the short term but are too extreme to remain in effect for too long. A number of products use this forward dating mechanism, including those based on the Bloomberg Commodity Index, the most widely utilized commodity benchmark.

Robert Minter is director of ETF investment strategy at abrdn.

ii is an abrdn business. 
abrdn is a global investment company that helps customers plan, save and invest for their future

1) "Trump Forged His Ideas on Trade in the 1980s—and Never Deviated." The Wall Street Journal, November 2018. https://www.wsj.com/articles/trump-forged-his-ideas-on-trade-in-the-1980sand-never-deviated-1542304508.
2) "America’s Growing Trade Deficit Is Selling the Nation Out From Under Us. Here’s a Way to Fix the Problem—And We Need to Do It Now." Fortune, November 2003. https://www.berkshirehathaway.com/letters/growing.pdf.
3) "U.S. tariffs are among the lowest in the world – and in the nation’s history." Pew Research Center, March 2018. https://www.pewresearch.org/short-reads/2018/03/22/u-s-tariffs-are-among-the-lowest-in-the-world-and-in-the-nations-history/.
4) "Want Free Trade? May I Introduce You To The tariff." The New York Times, February 2025. https://www.nytimes.com/2025/02/06/opinion/tariff-free-trade-new-system.html.
5) Bloomberg data: IEA global crude demand 12/31/1990–12/31/2024
6) "North America E&Ps to focus on capital discipline." S&P Global, January 2018. https://www.spglobal.com/commodityinsights/es/market-insights/latest-news/oil/012418-north-america-eampps-to-focus-on-capital-discipline.
7) "Treasury Intensifies Sanctions Against Russia by Targeting Russia’s Oil Production and Exports." U.S. Department of the Treasury, January 2025. https://home.treasury.gov/news/press-releases/jy2777.
8) "U.S. climate winter recap and summary for February 2024." NOAA National Centers for Environmental Information, March 2024. https://www.climate.gov/news-features/understanding-climate/us-climate-winter-recap-and-summary-february-2024#.
9) "Spot Henry Hub natural gas prices hit a historic low in 2024." Today in Energy. U.S. Energy Information Administration, January 2025. https://www.eia.gov/todayinenergy/detail.php?id=64184.
10) "Ukraine halts transit of Russian gas to Europe after a prewar deal expired." AP News, January 2025. https://apnews.com/article/russia-ukraine-war-gas-transit-supplies-gazprom-7775fea34a7be9723b991d835a7ebd6f.
11) Bloomberg data: TTF price 12/31/2014–12/31/2019; TTF price 2/12/2025
12) "Trump steps up his 2018 tariffs on steel and aluminum, risking inflation on promise of more jobs." AP News, February 2025. https://apnews.com/article/trump-tariffs-steel-aluminum-china-canada-mexico-0a91ceaf3aa3c1756c339817d1d58076.
13) Bloomberg data: Bloomberg Agricultural Grains Subindex rose 79% 12/31/2006–2/29/2008; rose 56% 12/31/2009–2/28/2011; rose 48% 12/31/2019–4/30/2021; rose only 12% 12/31/2015–10/31/2016.
14) Bloomberg data: Coffee 12/31/2016–12/31/2019; Coffee price 2/12/2025.
15) "Your Arabica Coffee Will Get Even Pricier as Beans Soar to Record $4 a Pound." Bloomberg, February 2025. https://www.bloomberg.com/news/articles/2025-02-05/coffee-soars-to-record-4-mark-as-supply-fears-power-rally.
16) "Porsche Is Pivoting Back to Combustion. It Will Cost Them Dearly." Motor.com, February 2025. https://www.motor1.com/news/750016/porsche-pivoting-combustion-cost-dearly/.