Second half of 2026: Commodities enter the era of "high-frequency black swans"!

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Against the backdrop of intertwined geopolitical, climate, and technological shocks, Citi believes that "black swan" events in the commodity market are evolving from once-in-a-decade occurrences to an almost normal state.

According to Wind Chasing Trading Desk, on July 23, Citi Research's Eric G Lee team released a report outlining potential extreme risk scenarios for the second half of 2026 and beyond, where the magnitude of price shocks would be sufficient to render traditional supply and demand analytical frameworks invalid.

Tail risk scenarios covered by Citi Research include: U.S.-Iran conflict escalating from a temporary shock to years of disruption, a race for stockpiling key minerals, gold first falling 15%-20% then doubling, extreme El Niño weather impacting agricultural products, and AI bubble bursting or ongoing boom triggering two-way volatility, among others.

Since 2020, the commodity markets have experienced the Covid-19 pandemic, the Russia-Ukraine conflict, trade wars, central bank gold-buying booms, and repeated outbreaks of Middle East conflicts, making the frequency of extreme events unprecedented.

The report notes these risk scenarios are not baseline forecasts, but "tail events" that are possible and, if they occur, would have enormous impacts. They are intended to supplement Citi's existing baseline scenario forecasts.

Highest Risk: U.S.-Iran Conflict Escalates into Years-Long Supply Crisis

Citi ranks the escalation of the U.S.-Iran conflict as the most impactful tail scenario, though assessed as "low" probability.

The report notes that from the "12-day war" in June 2025 when the U.S. and Israel jointly strike Iran's nuclear facilities, to renewal of conflict in February 2026, a fragile ceasefire in June, and military escalation again in July 2026, oil and refined product prices have undergone multiple rounds of intense volatility.

If the conflict further expands, Iran could attack energy infrastructure in Gulf oil-producing countries. Combined with long-term closure of the Strait of Hormuz and interruptions in the Bab-el-Mandeb Strait, the world may face a sustained daily supply shortfall of 5 to 10 million barrels.

Citi estimates that, assuming demand elasticity of roughly -0.05, such a scale of supply loss would drive oil prices up 100% to 200%, i.e., spot crude rising above $200/barrel, with U.S. retail gasoline prices staying above $6/gallon.

The report cites historical data showing that if global (excluding China) oil inventories fall below 70 days of consumption, Brent real prices have exceeded $150/barrel.

(In the past, when crude inventories outside China dropped to a 90-day low, Brent oil prices exceeded $150/barrel)

If oil and gas expenditure as a % of GDP repeats the 8% peak of the 1970s second oil crisis, oil prices would need to exceed $200/barrel.

(If inventories outside China drop to late-1970s levels, oil product prices would roughly double from current levels)

As of July 2026, global oil inventories outside China still stand at around 94 days of consumption, but Citi predicts that if a global deficit of 7–8 million barrels per day persists, this figure could drop below 70 days in early 2027.

Russia-Ukraine Escalation: Gas Market Impact Exceeds Oil

Citi assesses the probability of tighter Russian energy export restrictions as "medium", and emphasizes the impact on the natural gas market will be greater than oil.

For LNG, Russia’s exports are about 44 bcm in 2025 (around 7% of global LNG supply), mainly from Yamal LNG and Sakhalin 2 projects.

(Most Yamal project's LNG exports go to Europe, and Europe’s share will further increase by 2026)

Over 70% of Sakhalin 2's exports go to Japan and South Korea; around 90% of Yamal's exports in mid-2026 go to Europe.

(Japan and South Korea jointly account for around 70% of Sakhalin 2’s LNG exports)

If there is a global ban on Russian LNG, over 30 bcm/year of supply would need to be redirected, but shipping and contract restrictions would result in a significant supply gap in the global LNG market.

For pipeline gas, due to physical pipeline constraints, flow directions cannot be easily changed, so banning Russian pipeline gas is even more disruptive.

Russia exports over 70 bcm/year of pipeline gas outside of China, with Europe and Turkey alone importing around 37 bcm/year.

Critical Mineral Stockpiling: Copper Price Could Exceed $20,000/ton

Citi evaluates the probability of a race for stockpiling key minerals as "high", with the impact varying depending on the commodity and stockpiling extent. If governments globally massively build up strategic minerals reserves, copper prices could be pushed above $20,000/ton.

The report notes that major economies such as the U.S. and EU have already given policy signals.

The U.S. "Project Vault" proposal aims to invest $12 billion stockpiling key industrial commodities, while the EU has announced a €3 billion fund for mineral security.

Citi models the copper market: If global refined copper inventories rise from about 1.3 months of consumption to 3 months, about 4 million tonnes must be accumulated in two years.

Based on historical scrap supply elasticity, this would require copper prices to surge to around $23,000/ton. Currently, Citi's baseline scenario is about $13,500/ton.

(Theoretical copper prices under various global stockpiling scenarios)

Gold: Could Drop 15–20% Short Term, Then Double After

Citi rates tail risk for gold as low probability and low direct impact, but significant within the scenario analysis framework.

Gold prices, after soaring from $2,500/oz in Jan 2025 to a peak of $5,500/oz in Feb 2026, have retreated to around $4,000/oz.

The report believes the next 4–6 weeks carry the greatest downside risk, and if prices fall below $3,800/oz, ETF and leveraged position liquidations could be triggered at large scale.

Potential triggers include: Middle East instability raising real rates and the dollar, and stock/bond market corrections causing liquidity crunches.

Nonetheless, the report remains highly optimistic on gold's medium- to long-term prospects.

China's $1.3+ trillion trade surplus, continued central bank buying, global fiscal sustainability concerns, and de-dollarization trends provide multiple long-term supports for gold demand.

Citi expects that, driven by major inflation declines and a new round of investor buying, gold could rise to $6,000/oz in coming years, nearly doubling from current levels.

Extreme El Niño: Cocoa Prices Could Return to $10,000/ton

The U.S. National Oceanic and Atmospheric Administration (NOAA) upgraded the probability of a strong El Niño event to 81% in its July forecast, with a 97% probability of lasting into spring 2027. Citi ranks this as a "medium probability, high impact" tail scenario.

(NOAA's El Niño probability forecast)

The report notes the impact of extreme El Niño differs significantly among crops. Cocoa, sugar, and robusta coffee are most affected; soybeans next; corn and wheat less so.

If West Africa experiences a Harmattan wind event similar to 2023–2024, cocoa supplies will be heavily impacted, with cocoa prices likely to return to $10,000/ton or higher, after setting new records in 2024–2025.

For sugar, low rainfall in India in June, coupled with potential monsoon deficits and flood risks in Thailand and Brazil, may push global sugar prices above 20 cents/lb.

Corn and soybean prices could be supported, as El Niño tends to boost yields in U.S. regions, but European heatwaves and weaker Indian monsoons are the main downside risks.

AI Boom and Bust: Two-way Shocks Reshape Commodities

Citi describes the impact of the AI scenario on commodities as "low to medium probability, highly differentiated shock".

AI infrastructure expansion is becoming a key driver of demand for electricity, natural gas, uranium, and grid metals such as copper and aluminum. The report forecasts U.S. data center power consumption to roughly double by 2030.

If the AI bubble bursts, data center construction will contract sharply, hurting actual and expected demand for copper, natural gas, and uranium, while plunging global risk appetite will further depress commodity demand.

Meanwhile, a weaker dollar could provide passive price support for commodities, and a sharply dovish Fed would partially underpin the market.

If AI productivity gains are realized, energy consumption will accelerate and grid investment will be pulled forward, further reinforcing the structural shortage narrative for copper and aluminum. Citi sees this as one path for copper to rise to $17,000/ton in a bull scenario.

Gold is viewed as the most asymmetric hedge in the AI scenario, with its own bullish rationale whether AI booms or busts.

Power of Siberia 2 & LNG Glut: Prices May Fall Below $6/MMBtu in the 2030s

Citi lists the signing of a final agreement between Russia and China for the Power of Siberia 2 pipeline as "medium probability, high impact".

The pipeline’s annual capacity reaches 50 bcm, and if it comes online around 2030, it will sharply reduce China’s LNG imports, exacerbating the expected oversupply in the global LNG market starting from 2028.

The report forecasts JKM Asian LNG benchmark prices could fall to $5–6/MMBtu in this scenario—well below current 2029–2030 futures prices above $8, and below the $7–10/MMBtu breakeven range for most new LNG terminals.

Citi points out the 50 bcm/year of potential new supply between China and Russia is almost equivalent to current Russian pipeline exports to Europe (53 bcm/year), with a much greater impact on the global LNG surplus than whether Russian pipeline gas returns to Europe.

Monroe Doctrine Extremism: If Americas' Oil Export Blocked, 1973 Could Repeat

If the U.S. takes the "Monroe Doctrine" to an extreme and blocks oil exports from Latin America or the entire Americas, global oil prices would be severely distorted.

The Monroe Doctrine is a core U.S. diplomatic policy proposed in 1823. Its main idea is "America for Americans", opposing European interference in the Americas, while also declaring U.S. non-interference in European affairs.

Citi lists "U.S. blocks all American crude oil exports" as a low probability, high impact scenario.

Assuming this, roughly 9.8 million barrels/day crude output from Latin America (including Mexico), about 10% of global output, would be cut off from the world market—an impact comparable to or even exceeding the 1973 Arab oil embargo.

(U.S. crude import prices: 2026 real and nominal values, 1974–2025)

Back then, the seven OPEC members cut output by about 3.6 million barrels/day (about 6% of global total), driving oil prices from about $3/barrel to $12/barrel by Jan 1974, a rise of about 300%.

In such a scenario, global benchmark crude (like Brent, Dubai) could surge above $100/barrel, while regional U.S. benchmarks (like WTI, WCS) could see discounts exceeding $30/barrel due to lack of export options, creating severe regional price splits.

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The above content comes from Wind Chasing Trading Desk.

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