Hormuz + El Niño double whammy, Citibank warns: Commodities may erupt into a super inflation storm!
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Two epic forces are simultaneously strangling the global commodity market.
In a report dated May 19, Citi issued its most severe inflation warning to date: The Strait of Hormuz blockade and a super El Niño are forming a historically rare "double whammy" scenario. The upside risks to energy and food prices are extremely asymmetric. If the current situation continues for six to nine months, global oil inventories will fall to levels seen during the second oil crisis of the 1970s, at which point global inflation could spiral out of control.
The numbers are enough to chill any macro investor: Since the start of 2026, global expenditures on oil and oil products have soared by about $2 trillion, with the annualized rate reaching around $4.6 trillion (about 3.7% of global GDP), compared to just about $2.6 trillion at the beginning of the year (about 2.1% of GDP).
In Citi’s forecast, Brent crude oil’s near-term target is $120/barrel, with a bull case potentially hitting $150/barrel. If oil prices rise to about $200/barrel, the ratio of oil expenditures to GDP will repeat the all-time highs of 7%-8% reached during the mid-2008 and late 1970s oil shocks.
Pressure is also mounting on agricultural products, with risk sources even more complex. The BCOM agriculture index is up 13% year-to-date, and the food composite price index is up 5%.
Citi points out that a prolonged Hormuz blockade will directly impact global agricultural output by disrupting fertilizer and pesticide supplies, while the probability of a strong El Niño, predicted by the US NOAA at 82%, will further hit crop yields in major regions such as South Asia and Southeast Asia. The two shocks stacked together mean that risks to agricultural product prices over the next 6-12 months are "heavily skewed to the upside."
In response to this dual shock, Citi suggests investors hedge food and energy price risks through diversified commodity exposure, noting that broad commodity indices now offer about 10% positive roll yield, the highest level in nearly 30 years. Citi remains bullish in the short term on Brent crude, European and Asian natural gas (TTF/JKM), aluminum, thermal coal, ICE sugar, and cocoa.
Hormuz Outlook: Baseline Scenario Reaches Memorandum of Understanding in July, Timeline Highly Uncertain
In Citi’s baseline scenario (50% probability), the US and Iran will reach some form of de-escalation memorandum of understanding (MOU) by around July, the Strait of Hormuz will gradually reopen in Q3 2026, but full recovery before year-end will be hard to achieve.
In the pessimistic scenario (30% probability), military escalation causes substantial damage to regional energy infrastructure, and an agreement is delayed. The optimistic scenario (20% probability) is that Iran reaches a broader agreement by the end of May, Middle East spare production capacity is gradually released in the second half of the year, and oil prices quickly decline back into an oversupply zone.
As for Iran’s motivation to maintain the strait blockade, Citi lists multiple considerations: maximizing deterrence against future attacks, maximizing present value of future oil revenues through ongoing stock drawdowns, and revenge for fallen leadership figures. Key variables pushing Iran back to the negotiating table include improving domestic economic performance and mitigating risk of international military intervention.
Citi believes that the core reason for no large-scale military escalation so far is Iran’s retained missile capacity to destroy regional energy infrastructure—if escalation occurs, it could lead to years-long permanent supply losses; at the same time, Iran also has the ability to strike US allies, including the UAE and Kuwait.
Citi also points out that neither the US nor Iran has yet suffered enough economic or political pain to push for a deal: US stock and bond markets are still generally resilient, whereas Iran’s hardline regime has both weapons capability, currency flexibility, and a certain level of food and medicine self-sufficiency.
Energy Prices Surge: Oil Products Near Historic Highs of Russia-Ukraine Conflict
The current energy shock has clearly transmitted to the end consumer. As of May 19, the global weighted average consumption price of major oil products has risen by about 91% year-to-date, reaching about $128 a barrel. Diesel has risen about 95%, jet fuel about 97%, gasoline about 99%, and the crack spread has widened about 186% compared to the start of the year.
In the US market, the national average price for regular gasoline is about $4.6/gallon, close to the historic peak of $5.0 during the Russia-Ukraine conflict, compared to just $3.4 at the beginning of the year; diesel is about $5.6–$5.7/gallon, also equal to the conflict’s peak, with a year-to-date jump of more than 60%.
Citi believes that the approaching summer driving season will further boost US domestic oil product pressures, which could become a key catalyst for the US to soften its stance in negotiations.
On European natural gas, Citi maintains a bullish view, predicting the 2026 TTF average will be $17.8 per MMBtu, higher than the current futures price of about $16. Citi notes that the longer the strait crisis drags on, the greater the risk that European storage falls to a five-year low before the heating season, potentially leading to non-linear price jumps. US natural gas, due to robust production, remains neutral, with Citi maintaining a forecast of $3.3/MMBtu for H2 2026.
Repeat of 1979? Inventory Redline Only 6–9 Months Away
Citi has laid out a clear timeline for a repeat of the 1970s crisis. If the global oil supply deficit continues at a rate of 7-8 million barrels per day, and 80-90% of the inventory drawdown occurs outside China, ex-China global oil inventories will fall below 70 days’ consumption in early 2027—the critical threshold reported during the second oil crisis in the OECD. The current figure is about 94 days.
Citi further calculates that if oil product output losses persist for another six months, oil prices will have to rise to around $200/barrel for oil expenditure as a share of global GDP to reach the mid-2008 and 1979 crisis peaks.
But even before that, the ongoing inventory pressure is already enough to trigger panic hoarding—Citi notes that some countries may introduce export bans first, leading to widespread stockpiling, as history showed in the 1970s.
Unlike in the 1970s, OECD strategic reserves have already committed to releasing about 400 million barrels after the conflict began (about 1.2 billion barrels before the conflict), which will somewhat smooth the pace of inventory depletion and the intensity of the price shock. Citi believes that, in the optimistic scenario (gradual reopening in Q3), the cumulative consumption of global oil inventories outside China will reach about 900 million barrels, reaching the lows of 2011-2014, but not triggering the pan-shortages of the 1970s.
Agriculture "Perfect Storm": Fertilizer Cutoff Plus El Niño
Citi analyzes three drivers behind the upside in agricultural prices.
Fertilizer supply shock: The Middle East is a key global fertilizer export hub; the share of world trade exported via the Strait of Hormuz is—sulfur about 49%, urea about 36%, ammonia about 29%, and diammonium phosphate (DAP) about 25%.
Fertilizers account for about 50% of the variable costs for major grains, and about 20–25% for sugar production. Prolonged supply tightening will mean major agricultural countries like Brazil and India fertilize less in the next planting season, directly reducing grain and sugar crop yields. In addition, oil-based fungicides and pesticides also face supply constraints, further weakening crop protection.
Biofuel substitution demand: With high energy prices, major global economies are accelerating ethanol blending—Brazil is moving from E30 to E32, India advancing to E20, Vietnam and Guatemala targeting E10. This will continue to divert sugar, corn and soybeans from food supply chains into energy consumption; Citi sees particularly notable impacts for sugar and corn.
El Niño shock: US NOAA predicts El Niño will emerge in May–July 2026, with an 82% probability and a 62% probability for a strong El Niño.
Citi notes that a strong El Niño will trigger drought in major producing areas such as India (the world's second-largest sugar producer and key exporter), Thailand, Pakistan, and Indonesia, drastically reducing sugarcane output; cocoa producing regions in West Africa and Ecuador will also be hit by drought; drought in Vietnam and Indonesia will significantly reduce Robusta coffee yields.
On this basis, Citi’s specific price targets are: Corn 3-month target 500 cents/bushel (+7%), Wheat 3-month target 700 cents/bushel (+5%), Sugar 3-month target 17 cents/pound (+14%), Cocoa 3-month target $5,000/ton, 12-month target $6,000/ton.
Aluminum: Strongest Supply Shock in 50 Years, Inventory Expected to Hit Record Low
Citi lists aluminum as its most favored metal, calling its supply-side bull case "the strongest in 50 years," and sets its target price for H2 2026 at $4,000/ton, with an extreme bull scenario (Iran agreement, oil price drop, strong global recovery) seeing a 2027 target of $5,350/ton.
On the supply shock, Citi estimates Middle East aluminum production loss at around 3 million tons in 2026, annualized at 4-4.5 million tons, equivalent to 10–15% of world ex-China supply, or 5–6% of global total. Even before this disruption, aluminum inventories were already at a 50-year low; under the base scenario, inventories will drop to new record lows in the next 6–12 months.
China’s ability to ramp up has been greatly restricted—in the past 20 years China provided about 90% of global supply increases, but is now constrained by capacity limits, with profitable operating plants running near full tilt. Indonesia is one of the few areas with real upside capacity, but the overall scale is limited and the timeline for expansion is uncertain.
Citi believes that only a global financial crisis-scale demand recession can stop further inventory declines in aluminum.
Gold: Short-Term Pressure from Cross-Asset Deleveraging, Medium-Long Term Stagflation Premium Yet to Emerge
Citi maintains its gold price targets: 0-3 months at $4,300/oz, 6–12 months at $5,000/oz.
In the short term, gold faces strong selling pressure, mainly due to cross-asset de-grossing—in the context of high oil prices and potential equity corrections, gold positions are especially vulnerable to risk events. Citi cites history, noting that at the onset of major risk asset selloffs, gold often drops first, then stabilizes as a safe haven, as in the 2008 global financial crisis.
In the bull case (30% probability), if the Iran conflict continues and triggers stagflation, gold may reach $6,000/oz by end-2026, and $7,000/oz by 2027, driven by expanding portfolio hedging demand and rising strategic gold allocations.
Citi simultaneously issues a structural warning: over the past three years, gold holders’ mark-to-market gains are about $17 trillion (actual price basis), and even if less than 6% of that profit shifts to other assets, it is enough to offset all current physical demand in the gold market, risking crypto-style volatility—especially if geopolitical uncertainty ebbs temporarily.
Citi’s Recommendation: Commodities Enter 30-Year Best Roll Yield Window
Facing these dual risks, Citi presents investors with a layered hedging framework.
Hormuz blockade and El Niño hedge: Go long near-term broad commodity index roll exposure. Citi notes that commodities now offer around 10% positive roll yield, a 30-year high, and that this feature will remain as long as tangible Strait of Hormuz disruptions persist; Citi also recommends going long broad agricultural commodity indices as food inflation hedges.
Hormuz-specific hedge: Go long European diesel and gasoline (versus short US counterparts)—prolonged blockade will increase the likelihood of US oil export bans, at which point US-EU product price spreads will widen sharply; go long near-term Brent; go long 2026 autumn TTF natural gas contracts, which Citi says have convex upside potential.
Strong El Niño-specific hedge: Go long sugar, Robusta coffee, and cocoa.
Other outstanding Citi active recommendations include going long aluminum (due to structurally significant shortage), and long lithium (based on persistent undersupply relative to demand). In addition, Citi’s ongoing recommended near-term Brent long (as measured by BCOMCOT) has risen about 10% this past month.
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The above content is from Chasing the Wind Trading Desk.
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~~~~~~~~~~~~~~~~~~~~~~~~
The above content is from Chasing the Wind Trading Desk.
For more detailed interpretation, including real-time analysis and frontline research, please join the [Chasing the Wind Trading Desk · Annual Membership]
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