From fresh sanctions targeting major producers to delicate hopes of peace deals in ongoing conflicts, the global commodities landscape is navigating a tense balancing act. On one side, tighter controls on Iranian and Russian crude threaten to pinch supply, while sabre-rattling in key regions disrupt trade routes for metals. On the other, signs of weakening economic growth, particularly in China, are driving down overall demand and keeping prices at bay. Consequently, despite strong headlines suggesting imminent crunches, oil, gas, and industrial metals have largely avoided the extreme price rallies many expected.

With inventories proving more resilient and OPEC+ indicating it can open or close the taps at will, volatility has remained elevated without creating a clear directional trend. What has emerged instead is a paradox where supply threats loom large in the news, yet lingering demand softness has so far mitigated the very sanction-driven spikes that seemed inevitable. For investors, the real question now is which force will dominate in the year ahead, and how best to navigate this ever-present geopolitical minefield, with the potential for sudden market shortfalls or the downward pull of an underwhelming global economy.

Oil Sanctions and Sluggish Demand

Oil sits at the centre of geopolitical flashpoints, with strict sanctions on Iran and Russia, which if rigorously enforced, could remove up to 1.7 million barrels per day from global supply, transforming a projected surplus into a deep deficit. Of course, OPEC+ could compensate this glut by ramping up production, as many Gulf producers hold large spare capacity, although they have shown no rush to flood the market, and may prefer to let risk premiums play out until there is decisive proof of shortages.

However, these supply threats have been overshadowed by tepid consumption trends, with physical markets indicating that demand in China and other large consumers is simply not firing on all cylinders. China’s post-pandemic recovery has disappointed, with repeated waves of stimulus doing little to energise growth in manufacturing or construction. To compound this issue, Europe and North America show few signs of robust expansion, and crude inventories in OECD countries have not only stayed comfortable but in some areas even risen. This dynamic has helped justify subdued pricing, cooling benchmark prices like Brent and WTI, and prompting traders to trim speculative net-longs. Meanwhile, option markets have grown more expensive, reflecting the possibility that fresh sanctions crackdowns, or even a single major outage, could abruptly tighten supplies.

However, the biggest threat on the horizon is a sudden pivot in trade restrictions or conflict conditions, as if sanction enforcements get teeth or a major producer’s output is severed, sentiment could flip in a matter of days. Additionally, a key wildcard is the so-called ‘shadow fleet’ supporting Russian oil exports, with tankers operating in semi-clandestine fashion, to make it tougher for Western authorities to track volumes and enforce sanctions. Consequently,  if regulators in Washington or Brussels step up secondary sanctions and maritime surveillance, a more meaningful chunk of Russian supply could vanish from official data. This could be the trigger needed for a reversal in sentiment, with a clampdown likely to jolt oil prices upward, especially if OPEC+ stands firm. Although for now, if these gray-market tankers continue unimpeded, the overall supply balance might remain less disrupted than headlines currently suggest. This uncertainty has led to institutional investors beginning to re-evaluate long oil positions, with a number of hedge funds having closed or scaled back bullish bets, wary that weak global growth could override potential supply hiccups.

Natural Gas Scarcity and The Peace Premium

Nowhere is the geopolitical instability more apparent than in Europe’s natural gas markets, where the war in Ukraine, combined with efforts to block Russian pipeline flows, has pushed European inventories into a steeper drawdown than many policymakers had anticipated. By late February, storage slipped to around 40% fullness, raising questions about how comfortably the region can refill for next winter. Consequently, talk of any plausible ceasefire or peace agreement in Ukraine will temper gas prices, as markets are poised to price in a return of Russian pipeline volumes if hostilities subside. 

This has created a significant binary event whereby natural gas prices could plunge if a credible deal emerges, or remain on edge if the conflict drags on. Additionally, policymakers in Europe are continuing to explore long-term strategies to reduce dependency on Russian supplies altogether, including new LNG facilities and alternative pipeline deals. However, in the near term, gas prices are likely to remain volatile, driven by fleeting ceasefire rumours on one side and real structural shifts on the other, with industrial users forward-buying to reduce exposure to price whipsaws.

Industrial Metals Face Logistical Havoc

The volatility in commodity markets extends beyond energy, with aluminium, copper, and other industrial metals facing disruptions from forced re-routing of shipments and strained geopolitical relationships. The Russia-Ukraine conflict has impeded standard trade for critical minerals like manganese and tungsten, prompting customers to seek new channels. Meanwhile, conflict flashpoints in the Middle East threaten major shipping routes, along with heightened insurance rates and longer transit times, effectively acting as stealth taxes on global manufacturing.

Surprisingly though, despite these logistical roadblocks, most base metals have not rallied aggressively, suggesting that end-user demand is cooling in tandem with global factory activity. Many manufacturers, wary of rising tariffs or potential supply shocks, are deferring big purchase orders and operating with leaner inventories. This dynamic is keeping prices in a somewhat uneasy balance, with supply constraints and demand caution canceling each other out in the short-term. However, once heightened geopolitical frictions fade, metals demand could snap back if growth stabilises, trade barriers ease, or large-scale Chinese stimulus is announced.

Sanctions Minefield Strategy

With geopolitical pressures running hot, many institutional money managers are preparing for the possibility of abrupt supply disruptions in the energy market, as a re-energised sanctions regime against Iran or Russia, or a targeted crackdown on smuggling tankers, could significantly impact immediate oil prices. For that reason, a number of institutions are likely employing out-of-the-money call options on crude, looking for asymmetric payoff if the market suddenly tightens. This strategy is also applicable to the natural gas market, as Europe’s dependence on stable imports, now hampered by fragile logistics, makes options-based hedges appealing for both producers and industrial buyers.

On the other hand, many market participants expect demand to stay lacklustre unless China starts firing on all cylinders, prompting a degree of caution, and leading to net-long exposure to oil or base metals shrinking. Additionally, the risk of a broader global slowdown if trade tensions with China intensify has meant that institutions are keeping a portion of their portfolios in defensive allocations such as gold or short-duration fixed income, reflecting a neutral stance until more convincing signs of economic traction emerge. Given how quickly these macroeconomic shocks can move commodities markets, many funds are pivoting to shorter-term trading horizons or relying on nimble hedges that can be adjusted according to geopolitical events.

Navigating Risks and Rewards

Despite the talk of crisis dominating the news cycle, commodity markets have, so far, been guided more by sluggish economic growth than by sanctions-driven supply shortfalls. Oil prices remain subdued despite repeated threats to global output, and metals are floating in a low-volatility environment that belies the many choke points in shipping lanes. However, these conditions could shift abruptly if Western authorities enforce sanctions more stringently, or if conflict escalates further in any of the several active hotspots.

To navigate this minefield of reduced global demand combined with the persistent risk of sudden supply crunches, many allocation strategies will revolve around selective hedging, balanced positioning, and close monitoring of diplomatic developments. If growth unexpectedly picks up or if conflict dynamics shift, opportunities could arise for those who can pivot quickly, with geopolitics dictating as many commodity outcomes as raw fundamentals. Therefore, although the near-term narrative looks subdued, the latent potential for abrupt price surges, or collapses, means that the year ahead will remain a high-stakes environment, with caution and diligence being essential.