In the second half of 2026, commodities enter an era of "high-frequency black swans"

Original Author: Bao Yilong

Original Source: Wall Street Sights

Amid intersecting geopolitical, climate, and technological shocks, Citi believes that "black swan" events in the commodity market have evolved from once-in-a-decade occurrences to near-commonplace phenomena.

According to desk sources, on July 23, Citi Research's Eric G. Lee team published a report, outlining potential extreme risk scenarios for the second half of 2026 and beyond, with price shock magnitudes large enough to render traditional supply-demand analysis frameworks ineffective.

The tail risk scenarios covered by Citi Research include: The US-Iran conflict evolving from a temporary shock into a multi-year persistent disruption, a hoarding race for critical minerals, gold initially falling 15% to 20% before doubling, extreme El Niño weather impacting agricultural products, and the bursting or sustained boom of the AI bubble causing two-way volatility.

Since 2020, the commodity market has experienced the COVID-19 pandemic, the Russia-Ukraine conflict, trade wars, a central bank gold buying spree, and repeated outbreaks of conflict in the Middle East. The frequency of extreme events is unprecedented.

The report notes that these risk scenarios are not baseline forecasts but rather "tail events" that could happen and would have significant impacts if they did, aiming to supplement Citi's existing baseline forecasting framework.

Highest Risk: US-Iran Conflict Evolves into Multi-Year Supply Crisis

Citi ranks an escalation of the US-Iran conflict as the highest-impact tail scenario, although its probability is assessed as "low."

The report points out that since the "12-day war" involving US-Israeli strikes on Iranian nuclear facilities in June 2025, the resumption of conflict in February 2026, the signing of a fragile ceasefire agreement in June, and another military escalation in July 2026, oil and refined product prices have experienced multiple rounds of violent fluctuations.

If the conflict expands further, Iran could potentially strike energy infrastructure of Gulf oil-producing countries. Coupled with a prolonged closure of the Strait of Hormuz and disruption in the Bab el-Mandeb Strait, the world could face a sustained supply shortfall of 5 to 10 million barrels per day.

Citi estimates that under the assumption of a demand elasticity of approximately -0.05, supply losses of this magnitude would drive oil prices up by 100% to 200%, meaning all-grade crude oil could exceed $200 per barrel, and US retail gasoline prices could remain persistently above $6 per gallon.

The report cites historical data showing that if global oil inventories excluding China fall below the 70-day consumption cover level, the corresponding Brent actual oil price has historically exceeded $150 per barrel.

(Previously, when crude oil inventories outside China fell to a 90-day low, Brent oil exceeded $150/barrel)

If the oil and gas expenditure share of GDP were to replicate the 8% peak of the second oil crisis in the 1970s, the required oil price level would exceed $200 per barrel.

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

As of July 2026, total global oil inventories outside China remain at approximately 94 days of consumption. However, Citi predicts that if a global deficit of 7 to 8 million barrels per day persists, this metric could fall below 70 days by early 2027.

Russia-Ukraine Escalation: Natural Gas Market Expected to Be Hit Harder than Oil

Citi rates the likelihood of stricter restrictions on Russian energy exports as "medium probability" and emphasizes its impact on the natural gas market would be greater than on oil.

Regarding LNG, Russia exported approximately 44 billion cubic meters (bcm) in 2025, accounting for about 7% of global LNG supply, primarily from the Yamal LNG and Sakhalin-2 projects.

(Most of the LNG from the Yamal project is exported to Europe, with Europe's share expected to increase further in 2026)

Over 70% of Sakhalin-2 exports flow to Japan and South Korea; as of mid-2026, about 90% of Yamal project exports went to Europe.

(Japan and South Korea together account for approximately 70% of Sakhalin-2's LNG export share)

If a global ban on purchasing Russian LNG is enacted, over 30 bcm of annual supply would need to be redirected. However, due to shipping and contractual constraints, the global LNG market would face a significant supply gap.

In terms of pipeline gas, the destructive power of a ban on buying Russian pipeline gas is even greater due to physical pipeline constraints that make it difficult to flexibly adjust the direction of gas flows.

Russia exports over 70 bcm of pipeline gas annually to markets outside China, of which imports by Europe and Turkey alone total about 37 bcm.

Critical Mineral Hoarding: Copper Prices Could Break $20,000/Ton

Citi rates the probability of a critical mineral hoarding race as "high," with the impact varying by commodity and the extent of stockpiling. If governments massively accumulate strategic mineral reserves, copper prices could be pushed above $20,000 per ton.

The report notes that major global economies, such as the US and EU, have already shown policy signals.

The US "Project Vault" proposal aims to spend $12 billion stockpiling critical industrial commodities, while the EU has announced €3 billion in funds for critical mineral security.

Using the copper market as an example, Citi estimates: if global refined copper inventories increase from the current ~1.3 months of consumption to 3 months, approximately 4 million tons of copper would need to be accumulated over two years.

Based on historical scrap copper supply elasticity, this would require the copper price to rise to around $23,000 per ton. Currently, the copper price in Citi's baseline scenario is approximately $13,500 per ton.

(Theoretical copper prices under various global inventory increase scenarios)

Gold: Could Fall Another 15% to 20% in the Short Term Before Doubling Later

Citi rates gold's tail risk as low probability, low direct impact, but significant within its scenario analysis framework.

The gold price, after surging from $2,500 per ounce in January 2025 to a peak of $5,500 per ounce in February 2026, has now fallen back to around $4,000 per ounce.

The report believes the risk of a downside surprise is most concentrated in the next 4 to 6 weeks. Once the price breaks below $3,800 per ounce, liquidation pressure from ETFs and leveraged positions could be massively triggered.

Potential triggers include: deterioration in the Middle East situation pushing up real interest rates and the US dollar, as well as adjustments in stock and bond markets triggering a liquidity crunch.

However, the report remains highly optimistic about gold's medium-to-long-term trajectory.

China's trade surplus exceeding $1.3 trillion, continued central bank purchases, global concerns about fiscal sustainability, and the dedollarization trend constitute multiple supports for long-term gold demand.

Citi expects gold to rise to $6,000 per ounce over the next few years, nearly doubling from current levels, driven by major inflationary declines and a new wave of investor buying.

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

The US National Oceanic and Atmospheric Administration (NOAA) updated its forecast in July, raising the probability of a very strong El Niño event to 81%, with a 97% chance of it persisting until the spring of 2027. Citi lists this as a "medium probability, high impact" tail scenario.

(NOAA's El Niño probability forecast)

The report notes significant differences in the impact of extreme El Niño on various agricultural products. Cocoa, sugar, and Robusta coffee are most affected; soybeans are secondary; corn and wheat are relatively less impacted.

If West Africa experiences a Harmattan wind similar to the 2023-2024 season, cocoa supply would be severely impacted, with cocoa prices potentially returning to $10,000 per ton or even higher, after previously hitting all-time highs in 2024-2025.

Regarding sugar, below-average rainfall in India in June, combined with the dual risks of potential monsoon deficiencies and floods in Thailand and Brazil, could push global sugar prices above 20 cents per pound.

Corn and soybean prices receive some support from El Niño, which typically favors increased production in US growing regions, while European heatwaves and a weakening Indian monsoon remain key downside risks.

AI Boom and Bust: Two-Way Shocks Create Divergent Commodity Landscape

Citi characterizes the impact of AI scenarios on commodities as "low to medium probability, highly divergent shocks."

The expansion of AI infrastructure is becoming a significant driver of demand for electricity, natural gas, uranium, and grid metals like copper and aluminum. The report estimates that US data center electricity consumption will roughly double by 2030.

If the AI bubble bursts, data center construction would contract sharply, harming both actual and expected demand for copper, natural gas, and uranium. A decline in global risk appetite would further trigger a contraction in commodity demand.

However, a weakening US dollar could provide passive support for commodity prices, and significant Fed rate cuts would also underpin the market to some extent.

If the AI productivity dividend materializes, accelerating energy consumption and early grid investment would reinforce the narrative of structural deficits for copper and aluminum. Citi sees this as one pathway to the bull case scenario of copper rising to $17,000 per ton.

Gold is viewed as the most asymmetric hedge in AI scenarios, with a logic for benefiting regardless of whether a boom or bust occurs.

Power of Siberia 2 and LNG Glut: Prices Could Drop Below $6/mmBtu in the 2030s

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

With an annual capacity of 50 bcm, if the pipeline comes online around 2030, it would significantly reduce China's LNG import needs, exacerbating the already anticipated loosening of the global LNG market starting from 2028.

Under this scenario, the report predicts that the JKM Asian LNG benchmark price could fall to $5 to $6 per million British thermal units (mmBtu), well below the current futures prices of over $8 for 2029-2030 and far below the breakeven range of $7 to $10 for most new LNG supply terminals.

Citi notes that the potential new supply of 50 bcm/year between China and Russia is roughly equivalent to the approximately 53 bcm/year Russia previously exported to Europe via existing pipelines. Its impact on the global LNG glut would far surpass the debate over whether Russian pipeline gas will return to Europe.

Extreme Monroe Doctrine: Blockade of Americas' Oil Could Mirror 1973

If the US were to push the Monroe Doctrine to an extreme, blockading oil exports from Latin America, or even the entire Western Hemisphere, the global oil price landscape would be severely distorted.

The Monroe Doctrine is a core US foreign policy articulated in 1823, whose central tenet is "America for the Americans," aiming to oppose European interference in the affairs of the Americas while declaring US non-interference in European internal matters.

Citi lists a "US blockade of all oil exports from the Americas" as a low-probability, high-impact scenario.

Under this assumption, Latin America (including Mexico), with a crude oil production of approximately 9.8 million barrels per day (about 10% of global total), would see its exports cut off from the global market. The impact could rival or even exceed that of the 1973 Arab oil embargo.

(US imported crude oil prices, 2026 real value vs. nominal value, 1974-2025)

At that time, seven OPEC members cut production by about 3.6 million barrels per day (approximately 6% of global total output), causing oil prices to spike from around $3/barrel to about $12/barrel in January 1974, a surge of roughly 300%.

In this scenario, global benchmark crude prices (e.g., Brent, Dubai) could surge above $100/barrel, while intra-Americas crude benchmarks (e.g., WTI, WCS) could see significant discounts exceeding $30/barrel due to a lack of export outlets, creating a dramatic regional price dislocation.