This week's Middle East situation pushed up crude oil and precious metals prices, with geopolitical risk premiums returning to normal.
2026-02-20 21:36:17
Commodity markets showed resilience again this week, with the Bloomberg Commodity Index rising approximately 1.7%. Geopolitical tensions, supply concerns, and resilient demand offset weakness in industrial metals due to the Lunar New Year holiday. The index tracks the performance of 25 major commodity futures and is up 9% year-to-date and 15% over the past 12 months. Energy and distillate fuels led the gains due to rising Middle East risk premiums, while wheat rose on weather threats and uncertainty surrounding the Black Sea situation.
Precious metals consolidated within a defined range, while soft commodities suffered a sharp decline due to the continued plunge in cocoa prices. Meanwhile, macroeconomic factors—including the Federal Reserve's cautious statements and extremely crowded short positions in the US dollar—added an important cross-asset dimension to the commodity market, which may influence its performance in the coming weeks.
Macroeconomic Background: Focus Shifts from Stock Market Volatility to Geopolitics and Interest Rates
This week, the focus across asset markets shifted from AI-driven earnings concerns and recent stock market volatility that triggered widespread risk aversion. While commodities were briefly affected, the sector still outperformed most financial assets, benefiting from structural supply constraints, resilient consumption, and an increasingly uncertain geopolitical environment.
Monetary policy expectations remain a significant influencing factor. The latest Federal Open Market Committee (FOMC) meeting minutes reinforced policymakers' hesitation regarding further interest rate cuts, reflecting concerns about the persistence of inflation and financial stability. This cautious tone pushed up US Treasury yields and intermittently supported the dollar, limiting the upward momentum of interest rate-sensitive assets such as gold.
Meanwhile, a Bank of America survey shows that sentiment towards the dollar is extremely pessimistic, with short positions in the dollar at record levels, reflecting market expectations of a weakening US economy and an eventual interest rate cut by the Federal Reserve. Continued dollar weakness will benefit commodities, but the crowded nature of the trades means that if US economic data exceeds expectations, it could trigger a sharp short-covering rally, or temporarily depress commodity prices.
When crude oil prices rise due to geopolitical tensions, the US dollar typically strengthens as a safe-haven currency. Major currencies such as the euro, yen, and pound sterling are all net energy importers, and rising oil prices worsen their trade balances; while the US, as the world's largest oil producer, can support the dollar during supply shocks. This dynamic, coupled with the Federal Reserve's hesitation to cut interest rates, explains why the dollar rose by about 1% this week, while other major currencies weakened across the board.
Energy: Geopolitical risk premium returns
The energy market was the dominant factor this week, with tensions in the Middle East pushing crude oil prices to a six-month high. Traders grew increasingly worried about the risk of diplomatic efforts failing after Trump warned Iran it had only 15 days to reach a nuclear agreement.
The Strait of Hormuz, one of the world's most critical oil shipping chokepoints, has seen a surge in hedging activity due to the potential for supply disruptions. The options market reflects this shift in risk perception: on Thursday, Brent crude call option volume exceeded 344,000 contracts, approximately 90% higher than the three-month daily average, while put option volume was less than half that, indicating strong market demand for upside protection. The current situation presents two extreme possibilities: a demilitarized solution could lead to a $5-7 plunge in oil prices; in the worst-case scenario, oil prices could significantly exceed $80 per barrel.
Therefore, the current rise is more a reflection of increased geopolitical risk premiums than a sudden shift in fundamentals. Global supply remains ample, and limited disruptions are likely to be absorbed by the market. However, the vulnerability of shipping through the Strait of Hormuz, coupled with the region's importance to global exports, means that the market must now consider the risk of long-term disruptions rather than short-term shocks.
Natural gas is a clear laggard in the energy sector, having surged to nearly $8 per million British thermal units (MMBtu) three weeks ago, but has fallen below $3 per MMBtu for the first time since October last year. The current weakness stems primarily from anticipated slowdown in winter demand and an ample supply outlook.
Precious Metals: Consolidation Amidst Mixed Bullish and Bearish Sentiment
Gold continues to trade within a wide range of $4,860-$5,140 per ounce. Geopolitical tensions and central bank buying provide underlying support, but rising US Treasury yields, a stronger dollar, and the Federal Reserve's cautious stance limit upward momentum. However, gold prices have recently demonstrated strong resilience despite the strengthening dollar, highlighting its ability to support hedging needs in investor portfolios.
Silver outperformed gold this week, but remains technically constrained. A decisive break above $86/oz is needed to attract new momentum and confirm a resumption of the uptrend. Until then, prices may remain volatile, reflecting its dual nature as both a currency and an industrial metal. This week, the gap between COMEX deliverable registered inventory and open interest in the SIH6 contract (which enters its delivery month on February 27) narrowed to 151 million ounces as of Thursday, a 25% decrease from last week. The March-May contract rollover spread steadily widened slightly to approximately 61 cents (the March contract underperformed the May contract), indicating that current rollover pressure is not significant.
Despite social media rife with claims that demand on COMEX/CME might exceed supply, the exchanges actually possess multiple mechanisms to maintain orderly delivery. However, this debate highlights the ongoing tension between "paper" silver and physical silver amidst tight supply of readily deliverable silver.
Industrial Metals: Lunar New Year Off-Season Masks Underlying Contradictions
Industrial metals trading was sluggish, with the Lunar New Year holiday leading to decreased market participation in Asia, particularly in China, the world's largest consumer of base metals. This seasonal lull is evident, as recent price strength is highly dependent on Chinese demand.
Copper prices edged lower, still pressured by rising exchange inventories (reaching 1.05 million tons, a 23-year high) and long position liquidation. However, in the long term, demand related to electrification, grid expansion, and energy transition continues to provide support. Market focus will shift to post-holiday demand signals and inventory trends in China to determine short-term direction.
Singapore iron ore futures fell for the sixth consecutive week, dropping to nearly $95 per tonne, a seven-month low. The decline reflects signs of market easing: rising Chinese port inventories, seasonal weakness in the steel market, and increased production by major miners.
Precious metals consolidated within a defined range, while soft commodities suffered a sharp decline due to the continued plunge in cocoa prices. Meanwhile, macroeconomic factors—including the Federal Reserve's cautious statements and extremely crowded short positions in the US dollar—added an important cross-asset dimension to the commodity market, which may influence its performance in the coming weeks.
Macroeconomic Background: Focus Shifts from Stock Market Volatility to Geopolitics and Interest Rates
This week, the focus across asset markets shifted from AI-driven earnings concerns and recent stock market volatility that triggered widespread risk aversion. While commodities were briefly affected, the sector still outperformed most financial assets, benefiting from structural supply constraints, resilient consumption, and an increasingly uncertain geopolitical environment.
Monetary policy expectations remain a significant influencing factor. The latest Federal Open Market Committee (FOMC) meeting minutes reinforced policymakers' hesitation regarding further interest rate cuts, reflecting concerns about the persistence of inflation and financial stability. This cautious tone pushed up US Treasury yields and intermittently supported the dollar, limiting the upward momentum of interest rate-sensitive assets such as gold.
Meanwhile, a Bank of America survey shows that sentiment towards the dollar is extremely pessimistic, with short positions in the dollar at record levels, reflecting market expectations of a weakening US economy and an eventual interest rate cut by the Federal Reserve. Continued dollar weakness will benefit commodities, but the crowded nature of the trades means that if US economic data exceeds expectations, it could trigger a sharp short-covering rally, or temporarily depress commodity prices.
When crude oil prices rise due to geopolitical tensions, the US dollar typically strengthens as a safe-haven currency. Major currencies such as the euro, yen, and pound sterling are all net energy importers, and rising oil prices worsen their trade balances; while the US, as the world's largest oil producer, can support the dollar during supply shocks. This dynamic, coupled with the Federal Reserve's hesitation to cut interest rates, explains why the dollar rose by about 1% this week, while other major currencies weakened across the board.
Energy: Geopolitical risk premium returns
The energy market was the dominant factor this week, with tensions in the Middle East pushing crude oil prices to a six-month high. Traders grew increasingly worried about the risk of diplomatic efforts failing after Trump warned Iran it had only 15 days to reach a nuclear agreement.
The Strait of Hormuz, one of the world's most critical oil shipping chokepoints, has seen a surge in hedging activity due to the potential for supply disruptions. The options market reflects this shift in risk perception: on Thursday, Brent crude call option volume exceeded 344,000 contracts, approximately 90% higher than the three-month daily average, while put option volume was less than half that, indicating strong market demand for upside protection. The current situation presents two extreme possibilities: a demilitarized solution could lead to a $5-7 plunge in oil prices; in the worst-case scenario, oil prices could significantly exceed $80 per barrel.
Therefore, the current rise is more a reflection of increased geopolitical risk premiums than a sudden shift in fundamentals. Global supply remains ample, and limited disruptions are likely to be absorbed by the market. However, the vulnerability of shipping through the Strait of Hormuz, coupled with the region's importance to global exports, means that the market must now consider the risk of long-term disruptions rather than short-term shocks.
Natural gas is a clear laggard in the energy sector, having surged to nearly $8 per million British thermal units (MMBtu) three weeks ago, but has fallen below $3 per MMBtu for the first time since October last year. The current weakness stems primarily from anticipated slowdown in winter demand and an ample supply outlook.
Precious Metals: Consolidation Amidst Mixed Bullish and Bearish Sentiment
Gold continues to trade within a wide range of $4,860-$5,140 per ounce. Geopolitical tensions and central bank buying provide underlying support, but rising US Treasury yields, a stronger dollar, and the Federal Reserve's cautious stance limit upward momentum. However, gold prices have recently demonstrated strong resilience despite the strengthening dollar, highlighting its ability to support hedging needs in investor portfolios.
Silver outperformed gold this week, but remains technically constrained. A decisive break above $86/oz is needed to attract new momentum and confirm a resumption of the uptrend. Until then, prices may remain volatile, reflecting its dual nature as both a currency and an industrial metal. This week, the gap between COMEX deliverable registered inventory and open interest in the SIH6 contract (which enters its delivery month on February 27) narrowed to 151 million ounces as of Thursday, a 25% decrease from last week. The March-May contract rollover spread steadily widened slightly to approximately 61 cents (the March contract underperformed the May contract), indicating that current rollover pressure is not significant.
Despite social media rife with claims that demand on COMEX/CME might exceed supply, the exchanges actually possess multiple mechanisms to maintain orderly delivery. However, this debate highlights the ongoing tension between "paper" silver and physical silver amidst tight supply of readily deliverable silver.
Industrial Metals: Lunar New Year Off-Season Masks Underlying Contradictions
Industrial metals trading was sluggish, with the Lunar New Year holiday leading to decreased market participation in Asia, particularly in China, the world's largest consumer of base metals. This seasonal lull is evident, as recent price strength is highly dependent on Chinese demand.
Copper prices edged lower, still pressured by rising exchange inventories (reaching 1.05 million tons, a 23-year high) and long position liquidation. However, in the long term, demand related to electrification, grid expansion, and energy transition continues to provide support. Market focus will shift to post-holiday demand signals and inventory trends in China to determine short-term direction.
Singapore iron ore futures fell for the sixth consecutive week, dropping to nearly $95 per tonne, a seven-month low. The decline reflects signs of market easing: rising Chinese port inventories, seasonal weakness in the steel market, and increased production by major miners.
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