Key points:

• The Bloomberg Commodity Total Return Index (BCOM TR) is heading for its first monthly decline in five months, driven primarily by an unwinding of the Middle East war premium in energy.
• Industrial metals bucked the broader weakness, led by copper and zinc, as tariff-related disruptions and structural demand trends continued to underpin prices.
• Agriculture softened amid improving weather conditions, harvest pressure and lower energy prices, weighing on grains, softs and livestock, while El Nino risks continue to rise.
• Gold successfully defended major technical support while remaining caught between easing energy-driven inflation concerns and a still-supportive long-term macro backdrop.

The Bloomberg Commodity Total Return Index is heading for a monthly loss of around 3%, trimming its year-to-date gain to 26%. The setback marks the first monthly decline since December but does little to alter the broader picture of commodities remaining one of the strongest-performing asset classes in 2026.

Macroeconomic signals also remained mixed. US first-quarter GDP growth was revised lower to 1.6%, reflecting weaker consumer spending. Meanwhile, April PCE inflation accelerated to 3.8% year-on-year, the highest reading since May 2023, highlighting that inflationary pressures remain elevated despite slower growth. The combination of softer growth and higher inflation continues to reinforce concerns that the global economy may be entering a period where growth becomes increasingly constrained by the rising cost of energy, commodities and infrastructure investment required to support electrification, AI data centres and climate adaptation.

Energy falls as ceasefire hopes gain momentum

The biggest driver behind the monthly decline in the commodity complex was energy reflected in the BCOM Energy TR Index heading for a loss of around 8%, with Brent crude, WTI crude, diesel and gasoline all suffering double-digit declines. The move follows growing optimism that the United States and Iran may be able to extend their ceasefire agreement, potentially creating the framework for a gradual reopening of the Strait of Hormuz. While significant hurdles remain, the market is reacting to the prospect of a supply surge once hundreds of tankers loaded with crude oil and refined fuels are released from the Persian Gulf.

Following the record 43% monthly surge back in March, Brent crude is heading for its largest monthly decline since April last year with prices falling towards a five-week low, yet still higher by around 29% since Operation Epic Fury began three months ago, while refined products such as diesel and gasoline have also retraced a significant part of their wartime gains.

The market is increasingly looking beyond current disruptions and focusing instead on what a reopening could mean for supply. Hundreds of tankers loaded with crude oil and refined fuels remain stranded or delayed across the Persian Gulf region, creating expectations that a successful agreement could trigger a substantial release of supply.

However, markets may be underestimating the time required to restore normal conditions. While a ceasefire may reopen shipping lanes, it does not immediately replenish inventories, restore damaged infrastructure or normalise trade flows. ADNOC's chief executive recently said it would take at least four months to return to 80% of pre-conflict flows, with full recovery potentially not arriving until the second quarter of 2027. Global inventories have been drawn down aggressively, while shipping routes, refinery operations and supply chains remain disrupted.

The world has also relied on several shock absorbers to prevent a much larger energy crisis. These include record US crude exports, strategic petroleum reserve releases, increased pipeline exports from Saudi Arabia and the UAE that bypass Hormuz, reduced Chinese imports and some demand destruction driven by elevated prices. As these buffers diminish, several industry participants continue to warn that underlying market tightness remains significant. While the geopolitical risk premium may be fading, the structural supply deficit that emerged during the conflict has not disappeared.

For that reason, the eventual floor under oil prices may settle well above pre-conflict levels. While front-month Brent futures traded sharply lower this week, the average price for 2027 held steady near USD 80, around 17% above the pre-war level, highlighting a market pricing in higher-for-longer oil prices.

Natural gas provided the main exception within energy. US natural gas rebounded around 14% during the month, supported by a smaller-than-expected stockpile build amid rising export demand. Nevertheless, it remains one of the weakest performers on a total return basis this year, down around 4%, illustrating how curve structure and rolling costs can significantly influence investor returns.

Backwardation boosts returns beyond the headline price move

The past three months have reminded investors that commodity returns are driven by more than changes in spot or front-month futures prices. The shape of the futures curve can materially affect performance through roll yield. This was evident during the energy market rally following Operation Epic Fury. As supply concerns intensified, crude oil and especially diesel futures curves moved into steep backwardation, where nearby contracts trade above deferred deliveries. For long only investors, this generates positive roll yield as positions are rolled into cheaper forward contracts.

The effect was most pronounced in distillate fuels. While front-month ULSD diesel futures rose around 34% from pre-war levels, the total return reached approximately 54%. London gas oil delivered a similar outcome, returning around 64% versus a gain of roughly 34% in the underlying futures contract.

Crude oil investors also benefited. Brent crude rose around 25%, but the total return reached approximately 44% as investors repeatedly rolled into lower-priced deferred contracts. Overall, the BCOM Energy Total Return Index has gained around 39% during the conflict, roughly ten percentage points more than implied by futures price movements alone.

Natural gas provided a stark contrast. Although front-month prices rose around 16.5%, a persistently contangoed market generated negative roll yield and left total returns close to flat.

The lesson is clear: in commodities, price direction is only part of the story. During periods of supply tightness, backwardation can significantly boost returns, while contango can erode them in oversupplied markets.

Copper leads industrial metals higher

While energy retreated, industrial metals enjoyed another strong month. The BCOM Industrial Metals Index gained around 6%, led by copper, zinc and aluminium. Copper remains the standout performer. COMEX copper is once again trading at a rising premium to London, echoing last year's market dislocation as traders continue moving metal into the United States amid renewed speculation about future import tariffs.

The result has been a surge in COMEX-monitored inventories while simultaneously tightening availability elsewhere. Rather than signalling weak demand, rising US inventories currently reflect a geographical reshuffling of supply. Attention is increasingly focused on the June 30 deadline for the US Commerce Secretary's review of the domestic copper market. The findings could ultimately pave the way for import duties beginning in January 2027.

Beyond tariffs, copper continues to benefit from a powerful long-term demand story: Electric vehicles, power grids, renewable energy installations, battery storage, cooling infrastructure and AI data centres all require substantial amounts of copper. At the same time, miners continue to struggle with declining ore grades, permitting challenges, geopolitical risks and rising capital costs. These constraints remain central to the longer-term bull case.

Aluminium also performed well as markets assessed the potential impact of ongoing disruptions to Gulf exports. While crude oil often dominates headlines, the conflict has affected a wide range of industrial commodities, including aluminium, fertilizers, petrochemicals and sulphur-related products essential for mining and manufacturing.

Gold survives another test

Precious metals endured another challenging month, although conditions improved towards month-end. Gold briefly came under renewed pressure before traders focused on lower oil prices, easing inflation concerns and reduced geopolitical risk. For a second time during the conflict, gold found support at its 200-day moving average, a level it has not closed below since October 2023.

Currently the level is around USD 4,400, and from a tactical perspective gold remains trapped within a narrowing range, with a break above USD 4,575 and ultimately the 50-day moving average near USD 4,628 needed to improve the outlook.

Gold's recent performance has been closely linked to developments in the energy market. Rising oil prices fuel inflation concerns, push bond yields and the dollar higher and create short-term headwinds for bullion. Conversely, falling oil prices help ease inflation expectations and support gold through lower yields and a weaker dollar.

While this relationship has dominated trading for much of the past three months, we maintain the view that gold remains a strategic allocation rather than a tactical trade. In a world defined by central bank diversification away from the dollar, rising fiscal debt burdens, geopolitical uncertainty and long-term inflation risks associated with commodity supply constraints, we continue to see support for the investment case for gold.

Silver outperformed gold during May, reflecting both its monetary characteristics and its growing importance as an industrial metal. Demand linked to solar energy, electrification and advanced manufacturing continues to provide support despite periodic concerns about global growth.

Agriculture loses momentum

Agriculture was another source of weakness during May, with the Bloomberg Agriculture Index heading for a modest decline, led by losses in wheat, corn, sugar, coffee and livestock, and only partly offset by gains in soybean products and cocoa. Improving weather conditions, incoming harvest pressure and lower energy prices all contributed to softer prices.

Wheat prices retreated as concerns about drought in several major producing regions eased and harvest prospects improved. Corn also weakened as rainfall improved soil moisture across parts of the US Midwest, supporting crop development. Lower crude oil prices added pressure by reducing some of the inflationary concerns that had previously supported agricultural markets.

Sugar prices softened as improving production prospects in Brazil and lower energy prices reduced support from the biofuel sector. Coffee also struggled, while cocoa remained one of the month's strongest performers despite continuing to trade sharply lower on a year-to-date basis following its collapse from record highs.

El Niño risk moves onto the horizon

While improving weather conditions have recently weighed on agricultural prices, markets are increasingly monitoring the potential return of El Niño during the second half of 2026, raising the risk of another year of extreme weather and potentially record global temperatures in 2027.

The World Meteorological Organization recently warned that a developing El Niño could contribute to record global temperatures in 2027, increasing the risk of droughts, heatwaves, floods and other extreme weather events. Historically, El Niño has disrupted production of several key crops, including wheat, sugar, coffee, cocoa and palm oil, often leading to higher prices and increased volatility.

After several years of increasingly frequent weather disruptions, markets are likely to pay close attention to the development of El Niño in the months ahead. If forecasts of a stronger event prove correct, climate risk may once again become an important driver of agricultural prices, food inflation and commodity market volatility during 2027.

Looking ahead

The key question for June is whether markets have become too optimistic about the speed with which the global supply system can normalise. The sharp decline in energy prices reflects growing confidence that diplomacy may eventually restore flows through the Strait of Hormuz. Yet inventories remain depleted, supply chains remain stretched and many of the world's energy shock absorbers have already been heavily utilised.

At the same time, industrial metals continue to benefit from a combination of tariff-related disruptions and structural demand growth linked to electrification, energy security and artificial intelligence. The result is a commodity market entering a new phase. The acute panic surrounding Middle East supply disruptions may be fading, but the longer-term challenges associated with securing sufficient energy, metals and raw materials to support future economic growth remain firmly intact.