A Trade War Could Be Bad News for Commodities

Global demand for oil jumped more than expected at the end of 2024, with quarterly growth of 0.1 million barrels per day, or MMb/d (graph 1). But this was largely attributable to an uptick in imports by China’s oil and gas sector, rather than rising demand for petroleum products. Chinese demand for oil isn’t expected to rise by much in 2025, which makes sense given its faltering economic growth. We expect China’s real GDP to advance by 4.5% this year, down from 5.0% in 2024. That said, oil demand in other emerging economies like India will likely account for 80% of the 1.1 MMb/d bump forecasted by the International Energy Agency (IEA).

Demand for oil in the rest of the world is expected to grow only slightly. One reason for this is a drop-off in economic activity, especially in Europe. Another is the shift to electric transportation and remarkable advances in the energy efficiency of combustion engines, which are increasingly reining in gasoline consumption. Then we have to factor in the risk of a trade war between the United States and key trade partners like China, Canada, Mexico and the European Union. All of this economic uncertainty will weaken business and consumer confidence, tamping down demand for oil.

As for supply, in January OPEC+ production unexpectedly slipped 0.2 MMb/d, mainly in Africa and Iraq. This decline can be attributed to a multitude of factors, ranging from protests to a huge fire damaging oil facilities in Iraq. But the oil cartel has reaffirmed its intention to expand production starting in April, which could increase supply by slightly more than 0.1 MMb/d each month in an already glutted market. In addition, Brazil is joining OPEC+, although it won’t be required to meet production targets for the time being. This will amplify the cartel’s influence on prices, boosting its market share from 48.4% to 51.8%.

As for the US, Donald Trump wants to fuel domestic oil production by cutting regulations and opening up more federal lands for drilling. In a recent Economic Viewpoint External link., we determined that these policies could have a marginal effect on US production over the short term. That said, after 3 years, this extra growth would amount to more than $0.1 MMb/d annually. Our study also showed that low oil prices (graph 2) are the main factor that’s preventing producers from ramping up their output.

Meanwhile Canadian crude oil production picked up by 0.3 MMb/d in 2024. In addition, the opening of the Trans Mountain Expansion pipeline has already buoyed oil exports, with the share exported to Asia rising from 0% in January 2024 to 4% in November 2024 (graph 3). The US tariff threat could limit the increase in output to less than the 0.2 MMb/d expected for 2025. Canadian producers may wait and see what will happen before going ahead with their expansion plans. If the uncertainty lasts for too long, the Canadian oil sector may also see a pullback in investment. In the meantime, the WTI/WCS (Western Canadian Select) spread remains historically tight. Admittedly, the announcement of tariffs widened it to more than US$16 per barrel by the end of January, but it has since narrowed. We need to keep in mind that Canada still has surplus transportation capacity to export crude. But the spread could broaden by an average of US$2 per barrel if the US implements the 10% tariff announced on February 1 (graph 4). For more information, see our Economic Viewpoint on this topic. Note that our baseline scenario currently excludes tariffs on Canadian energy.

Slowdowns in refinery production due to weather events and planned maintenance in January limited gasoline supply in North America. This pushed average prices up by 4% in Canada and 2% in the US (graph 5). Much of the reason for the bigger price jump in Canada was the loonie’s depreciation, which inflated production costs for Canadian refiners importing US oil. Oil prices are expected to trend downward over the coming months, and gasoline prices should follow. If implemented, the 10% tariff on Canadian energy and any retaliatory measures could nevertheless send gasoline prices higher on both sides of the border.

Unseasonably cold temperatures and recent storms should keep Henry Hub prices lofty over the short term (graph 6). US natural gas inventories are down more than 40% from their November peak, which is a steeper seasonal drop than usual. Donald Trump’s return to the White House could drive natural gas prices even higher. The Biden administration had paused approvals for permits to build new natural gas export terminals, but the new administration wants to fast-track the process. This would mean more natural gas could be sold outside the oversupplied North American market, so Henry Hub prices could rise to more closely match natural gas prices on the international market. Increased demand from Europe and Asia should keep Henry Hub prices buoyant. Outside of the seasonal spring price drop, we expect Henry Hub to quickly bounce back and end the year at around US$3.4 per MMBtu. The cold snap in Europe also drove natural gas inventories lower than expected, causing prices to surge. The price of natural gas nevertheless isn’t expected to return to its 2022 peak, although it may retain some of the gains made in recent months.

Demand for aluminum may fade if the US makes good on its tariff threat. The Trump administration is slated to impose a 25% tax on all imports of this metal as of March 12, and Canadian producers could be smacked with an additional 10% tariff starting March 4. The second tariff was set out in the February 1 executive order that established a tariff on all items from Mexico and Canada. Consequently, Canadian aluminum producers may have to deal with a 35% levy at the US border. Our baseline scenario nevertheless assumes that a 10% tariff will be imposed starting in April. The industry is in good enough shape to ride out this storm, but it may still be affected if demand drops. For example, companies like Coca-Cola have already stated that they’ll be forced to switch from aluminum cans to plastic bottles if these tariffs are actually implemented. The downshift in US decarbonization efforts and weak European economic growth are also likely to erode aluminum prices. Despite all that, we don’t expect a sudden plunge. Instead, we see aluminum prices flatlining in the second half of the year. In the meantime, prices may jump over the very short term as companies stock up in anticipation of tariffs. In fact, we can already see this happening (graph 7).

As expected, the price of copper slid back down after its October peak and is currently around US$9,300 per ton. It has also benefited from pre-emptive inventory building before the US implements new tariffs (graph 8). The trade war may prevent copper prices from rising as much as expected, but electrification needs will still push them higher. The US and many other advanced economies will continue modernizing their energy infrastructure, especially to meet the needs of the AI boom. Our baseline scenario sees the price of copper rising, albeit at a slower pace, until it hits our year-end target of US$9,325 per ton. However, we’ll need to keep an eye on production in South American mines, where the risk of labour disputes that could drive up prices has increased in recent weeks.

The price of nickel perked up slightly in January as rumours circulated that production could shrink in Indonesia, the world’s largest producer. The rumours have since proven unfounded, but nickel prices still haven’t entirely given up their gains (graph 9). Excess nickel mining capacity suggests that prices will remain low for the next few quarters. Admittedly, we’re expecting prices to rise slightly to close out the year at US$17,000 per ton, which isn’t that high. Furthermore, Donald Trump’s dislike of electric vehicles could handicap the US battery industry, thereby restricting potential price growth. Elsewhere in the world, demand is expected to keep rising without major repercussions.

Although iron ore wasn’t directly targeted by Donald Trump, tariffs on steel imports will inevitably affect its price. This is expected to hover around US$105 per ton over the very short term, as businesses pre-emptively build up stock, but we anticipate iron ore will end the year at US$97 per ton due to weaker demand. In addition, despite the stimulus measures announced by the Chinese government, that country’s economy hasn’t perked up enough to boost iron ore prices. Meanwhile supply is expected to grow in 2025, especially in Australia, Brazil and China. However, most of our attention will be focused on the Simandou mine in Guinea. It’s the world’s biggest iron ore mining project, and its high-grade output (65% Fe) will compete with Canadian ore. The price difference between high-grade ore and the benchmark (62% Fe) narrowed from US $48.87 per ton in 2022, when it was at its widest, to US $11.10 per ton at the time of writing (graph 10). But it seems like iron prices have already factored in the opening of the Simandou mine. We therefore don’t expect the spread to narrow significantly more.

Inflows to gold exchange-traded funds (ETFs) climbed sharply in January, sending gold prices 10% higher (graph 11). This growth appears to be mostly driven by the prevailing uncertainty, but other fundamentals, such as interest rate cuts and a weaker US dollar, were also a factor (graph 12). Trump’s policies should give prices additional support over the coming months. First, a new trade war could push many investors toward safe-haven assets like gold, as well as fuelling inflationary pressures. Remember that gold is a good hedge against inflation. Second, the new administration’s proposed fiscal policy could swell the US federal deficit and national debt, giving gold another boost. Over the medium term, we expect soaring gold prices to spur supply, which will then keep pricing in check. Meanwhile the price of silver has kept ticking higher and is currently around US$32 per ounce at the time of writing. The favourable environment for precious metals should keep prices running hot in the coming quarters.

After peaking in October, platinum prices slid for two months and then started rising again in January, gaining 8% since the year began (graph 13). As with gold, safe-haven assets like platinum and palladium have benefited from the prevailing uncertainty. In addition, the rollback of transportation electrification efforts in the US should boost demand from the automotive sector. Both metals are used to manufacture gasoline engines. The price of palladium has also jumped 8% year-to-date. It could potentially soar even higher over the next several months, propelled by concerns over production in South Africa and possible sanctions on Russian palladium exports.

Lumber prices are up slightly since hitting bottom last June, but a steep run-up in November didn’t last long (graph 14). This brief spike was caused by lower production and heightened demand for lumber to use in post-hurricane repairs in the US. The North American market seems to be taking a wait-and-see approach now that the US-Canada trade war looms over the timber industry.

If a trade war erupts and the US implements a 25% tariff on imports, followed by equally high retaliatory tariffs imposed by Canada (the list of counter-tariffs External link. includes several varieties of sawn wood), prices could be affected in two different ways. In Canada, shrinking US demand could create a temporary surplus of inventory, lowering local prices. This would be followed by rebalancing, as sawmills slash production by shutting down temporarily or permanently. Given that North American demand for residential construction is expected to remain robust, this reduction in supply could force prices upward over the medium term. Concern over Canadian sawmills is understandable: Not only are they already facing countervailing duties of more than 14% when they export to the United States, but US demand for their products may fall if the tariffs come into effect. In fact, although the United States is partially dependent on Canadian lumber, the country produces 70% of the lumber it needs, and Canadian producers have to compete with European suppliers to provide the rest.  

As for pulp and paper, prices haven’t really budged in more than two years. But Canadian sawmills will be at risk if the US implements tariffs on imports, especially if those tariffs specifically target Canada but spare the rest of the world. US domestic production capacity for paper and cardboard products is relatively abundant. The country already imports these products from Brazil and Scandinavian countries, in addition to Canada (which nevertheless remains the leading supplier, representing 48% of US imports of pulp and paper).  

Grain and oilseed prices have gone up slightly since their August low (graph 15). Broadly speaking, a trade war could introduce more volatility and add a risk premium to agricultural commodity prices. We’ve already seen wheat prices shoot higher. They’ve also been driven up by greater demand for exports and unexpectedly cold weather in some regions (the Black Sea and the US Great Plains). As for corn, we’ll be keeping an eye on how much Brazilian and Argentine corn arrives on the spring market. Inadequate rainfall in Argentina and delayed planting of the Brazilian safrinha corn crop could limit supply. As for soybeans, record production in Brazil has pushed prices downward over the short term. But considerable demand from China—as shown by its record imports in 2025—should support prices.

Hurricanes Milton and Helene weakened US fertilizer production, while planting season, which starts in March in the US, is expected to drive up demand (Producteurs de grains du Québec External link., in French only). The price scenario for fertilizers therefore suggests they’ll increase slightly from current levels (graph 16), especially if tariffs are implemented by the US and other countries. Fertilizer production costs could also go up if there’s a broader trade war, which would drive up prices. Most of the potash used as fertilizer on US farms comes from Canada. A 25% import tariff could very well affect the cost of fertilizer bought by US farmers (see our recent analysis External link.). Higher fertilizer prices could eventually affect the cost of agricultural products, as was the case in 2022 with the outbreak of the war in Ukraine. If this happens, food inflation could start rising again.