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Implications of a potential Russia-Ukraine peace agreement for commodities

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

 

SOOJIN KIM
Research Analyst
DIFC Branch – Dubai
T:+971 (4)387 5031
E: soojin.kim@ae.mufg.jp

 

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Global commodities

Our 2025 commodities outlook had assumed that a ceasefire between Russia and Ukraine would occur this year, given President Trump’s strategy to prioritise initiating peace talks between the two nations, by leveraging his relationships with Presidents Putin and Zelensky to broker a deal. While we take no view on any potential future deliberations, we assess what a potential peace dividend would signal for commodity markets. The most acute impact from a peace deal would be borne in natural gas markets. Should a potential peace agreement include higher Russian pipeline natural gas flows via Ukraine to Europe, then this would make it easier for European gas storage to refill ahead of the next winter season. Conditional on gas volume availability, this would place significant downside pressure to our already bearish European natural gas (TTF) average price forecasts of EUR38/MWh this year. Meanwhile, the reverberations of a peace agreement on other commodities that Russia has a comparative advantage – crude oil, metals, coal – would be more muted given prevailing sanctions have not materially affected Russian export volumes, which have been predominantly diverted from Europe to Asia.

Energy

The bull case for oil is being buoyed by a confluence of supply-side constraints – challenges to Kazakhstan’s crude exports, the prospects of OPEC+ delaying further its production hikes beyond April 2025 as well as reports that the G7 is contemplating tightening the Russian oil price cap (currently USD6/b) to further pressure Russia’s oil revenues. Meanwhile, looming colder-than-normal weather is sending US natural gas (Henry Hub) prices to the highest in 14 months.

Base metals

The threat of US tariffs spreading beyond aluminium and steel into copper imports has sent the prices hovering close to overbought territory, as measured by the 14 day Relative Strength Index (RSI). Yet, history has proven that such protectionist measures can backfire. Copper fell ~20% during the last tariff cycle as trade war fears rattled markets – this time around a stronger US dollar and the slower-than-expected Fed easing cycle, could further pressure the base metals complex.

Precious metals

Gold’s resilient strength (+12% year-to-date) has surpassed even our own above consensus expectations, despite the move higher in the US dollar and yields, alongside growing prospects of a Russia-Ukraine peace dividend. We maintain our end-2025 gold forecast of USD3,080/oz, but acknowledge clear risks to the upside with bullion’s “smile” profile to US yields positions it favourably to hedge Trump 2.0 risks. In a more disruptive tariff/inflation path, gold can be viewed as a debasement hedge (higher yields, stronger US dollar and higher gold). Equally, in a more benign tariff/inflation path, gold is skewed in a more “traditional” way given its characteristic bullish tilt against falling yields with Fed cuts.

Bulk commodities

Iron ore is finding support after BHP Group – one of the largest global suppliers – flagged tentative signs of a recovery in the ailing Chinese property sector. Going forward, we remain bearish on iron ore prices as a structural decline in Chinese domestic steel demand (due to the end of rapid industrialisation), and new low-cost supply result in a significant build up in iron ore stocks. What’s more, our FX analysts believe that CNY/USD will depreciate towards 7.40 by year-end, which is a key impediment to iron ore prices (FX weakness is one of the several tools the Chinese authorities use to offset potential hit to Chinese growth from tariffs).

Agriculture

Corn prices have leaped to nine month highs with strong demand for US supplies overshadow apprehensions that President Trump’s reciprocal tariffs will prompt retaliation that would hamper exports.

Core indicators

Price performance and forecasts, flows, market positioning, timespreads, futures, inventories, storage and products performance are covered in the report.