Quarterly Forecast Update Edition

Macroeconomic Developments:

• Trump 2.0 has nearly arrived but the potential impact of his policies/tariffs is not so straightforward in the commodity space. Much will depend on the global policy response; for example, pressure on base metals prices would perhaps be offset from a strong stimulus package out of China.

• Crude oil is already reaping the benefits of tougher U.S. sanctions on Russia’s oil sector and the prospect of tighter sanctions on Iran imposed by Trump.

• Crops remain widely oversupplied after another strong crop in the Northern Hemisphere and amid signs of a good harvest shaping up in the South. The strong U.S. dollar and trade policy uncertainty have added to recent weakness.

• BMO Economics is projecting global growth of 3.0% in 2025 and 3.1% in 2026 (vs. 3.0% in 2024), barring any major Trump-driven tit-for-tat tariff war.

Commodity Forecast Highlights: [Quarterly Commentary Starting on Page 2]

• The BMO Capital Markets Commodity Price Index dipped 0.4% in December, bringing 2024's annual gain to 1.5%.

• Energy: No changes. We are sticking with our 2025 WTI forecast of US$75/bbl, as crude oil prices will remain highly volatile given both the uncertain global geopolitical and economic backdrops. Our 2025 Henry Hub forecast remains at US$3.25/mmbtu, as prices are likely to benefit from stronger European and Asian demand.

• Metals: Precious metals outlook lifted due to heightened fears around trade wars and inflation, despite the stronger U.S. dollar. Modest revisions to base metals, both higher (zinc) and lower (copper, nickel), with risks skewed to the downside.

• Forest Products: Western SPF lumber prices to rise to an average of US$440/mbf in 2025 and $450 in 2026 (from $408 in 2024) as demand from U.S. housing contends with elevated interest rates, while tariff uncertainty looms.

• Agriculture: The outlook for crops has been lowered amid signs of continued oversupply. The forecast for cattle has been lifted, as there are few indications of an imminent herd rebuild. Hog outlook unchanged.

Quarterly Forecast Update

Energy: Benchmark crude prices have received an unexpected boost to start the year. Speculation that President-elect Trump will expand oil sanctions on Iran coupled with the latest news that President Biden ramped up sanctions on Russia, particularly its tankers, has buoyed prices. The latest sanctions are aimed at preventing China and India from purchasing Russian crude. Nonetheless, the forecasting community does not have an overly optimistic view on the direction of prices, with a recent Reuters poll showing the average West Texas Intermediate (WTI) projection at US$70.86/bbl in 2025 (vs. $76.10 in 2024). BMO Economics’ forecast is a little more optimistic at $75 mainly because we argue that OPEC+ is unlikely to suddenly unwind its current production cut strategy. That said, we are of the view that the risks to prices lie more on the downside than upside given current global oil demand/supply trends.

The big risk facing crude oil prices is the prospect of supply outpacing demand given the stated desire of OPEC+ to bring barrels back to the market. The cartel’s current plan is to start unwinding the 2.2 mb/d in additional voluntary cuts starting April 1, 2025. Having already delayed this plan from October 1, 2024, we think the cartel will continue kicking this can down the road. Nevertheless, non-OPEC+ supply, led by the U.S., Brazil, Canada and Guyana, is still expected to grow by 1.5 mb/d in 2025, according to the latest IEA estimates. Moreover, even if the U.S. sanctions Iranian oil, we estimate this would only reduce that country’s production by 1.5 mb/d, similar to what occurred during Trump’s previous maximum-pressure strategy to denuclearize the regime. This is an amount that OPEC+ could handily offset given the cartel is currently holding back 5.8 mb/d, or 5.3% of total global production capacity.

On the flip side, the outlook for oil demand remains relatively subdued. The IEA is projecting global oil demand to grow by 1.1 mb/d to 103.9 mb/d in 2025, up from an estimated increase of 840 kb/d in 2024. We remain concerned that this projection may not be met if Chinese consumption continues to slow rapidly, which took the oil market by surprise last year. It’s estimated to have only grown by 150 kb/d in 2024, down from 1.4 mb/d in 2023 and an average of 600 kb/d in the prior decade. Put another way, China was typically accounting for half the annual increase in global oil demand until last year. Assessing future Chinese demand is not easy given how fast things can change in that country, whether it revolves around the robust adoption of electric vehicles, the rapid expansion of the high-speed rail network or greater reliance on LNG-fuelled trucks.

One cannot rule out the possibility that either global oil demand or supply could suddenly veer off on a much different path. Potential key developments that could limit supply and provide a big boost to crude oil prices include: (1) an escalation in the Middle East conflict that disrupts regional crude production, (2) a sharp drop in Russian oil output/exports due to war-related disruptions, or (3) a reversal in OPEC+ strategy to cut production instead. As for demand surprising on the upside, it all depends on the Chinese economy. Perhaps last year’s unexpected slowdown proves to be an aberration, or the authorities are able to reignite economic growth and demand for oil via a more concerted stimulus push.

Separately, the discount of Western Canada Select (WCS)—the country’s key heavy oil blend—to WTI looks to have settled in the US$12.00-to-$13.50/bbl range in recent weeks. If it stays around this level, this would be a big decline from the $18 averaged over the prior two years, although a smaller improvement versus the long-run average of $15. Nonetheless, it’s clear that the opening of the Trans Mountain pipeline expansion—TMX— in early May has made it cheaper to transport oil (compared to rail shipments to the U.S.) and, moreover, allowed Canadian oil to command higher prices on the international market due to direct shipments to overseas destinations (e.g., Asia). It’s difficult to gauge exactly where the WTI-WCS spread will ultimately settle but the $10.00-to-$12.50 range remains feasible. This is because U.S. demand for heavy oil from Canada is likely to increase as imports from Mexico decline once that country’s new refinery becomes fully operational.

This WCS projection is facing a big risk given Trump’s threat to impose a 25% tariff on imports of all Canadian goods. However, it’s not entirely clear how Canadian heavy crude oil prices would react. It appears WCS could be partially shielded, at least initially, as U.S. refineries, particularly in the Midwest, cannot easily replace such imports. U.S. imports of heavy oil from Mexico could also be hit by the same level of tariffs. Thus, Canadian producers may not have to lower prices that much to absorb the impact of the tariff, at least over the short run.

Global natural gas prices have started the year out strongly, benefiting from a combination of colder temperatures in the Northern Hemisphere and lower production. On the latter point, U.S. dry natural gas production fell 0.6% in 2024 (vs. +4.2% in 2023) and is projected to increase by only 0.5% in 2025. Thus, Henry Hub—North America’s benchmark—has averaged US$4.03/mmbtu in the year-to-date (vs. $3.01 in December and an average of $2.19 for 2024). As a consequence, we remain comfortable with our projection for Henry Hub to average $3.25 in 2025.

Beyond the short-term benefits of colder weather and constrained U.S. production, we continue to hold the view that Henry Hub should remain supported on account of two key developments. First, the recent completion of new LNG projects (Plaquemines LNG and Corpus Christi Stage III) should allow U.S. producers to take greater advantage of higher global natural gas prices. The price of LNG cargoes in East Asia stands around US$14.27/mmbtu in the year-to-date, while Title Transfer Facility—Europe’s natural gas benchmark—has averaged US$14.24/mmbtu. All told, the EIA calculates that North America’s LNG export capacity is on track to more than double from 2023’s level of 11.4 bcf/d (or 11.1% of total domestic production) to 24.4 bcf/d in 2028. Second, the outlook for global natural gas demand remains bright. The IEA reported global natural gas consumption rose 2.8% y/y in the first three quarters of 2024, well above the 2% annual average between 2010 and 2020, and is forecast to grow 2.3% in 2025. Moreover, big suppliers of LNG, including the U.S., Qatar and Australia, should benefit from the expiration of Russia’s gas transit contract with Ukraine at end-2024 alongside rising demand out of China (+10% increase in LNG imports in 2024).

On the flip side, Western Canadian natural gas prices remain very weak as Canadian producers have ramped up production in anticipation of the completion of LNG Canada in Kitimat B.C., which is expected to start operations by mid-2025. The new LNG export facility should allow Canadian natural gas producers, particularly in B.C., to tap higher prices overseas, particularly in Asia. Otherwise, the price of AECO (Western Canada’s natural gas benchmark) is still suffering from excess supply, averaging US$1.25-to-$1.50/mmbtu over the past month, though this is much better than the lows of 50 cents averaged in Q3. Otherwise, the Henry Hub-AECO spread has blown out to the $1.50-$2.50 range, compared to a historical average of $1.00 (the cost of transportation to Henry Hub in Louisiana). The spread is likely to take some time to normalize, but it should eventually narrow back to its long-term average once LNG Canada is fully operational, as the latter will draw heavily on production from Alberta.

Metals: Despite heightened geopolitical risks, renewed U.S. dollar strength and persistent weakness in China’s economy, last year proved to be a decent year for most metals, aided by the turn in the global monetary cycle and Chinese stimulus pronouncements. Nearly all of the precious and base metals we cover exceeded our initial expectations for 2024 (with the exception of nickel), with gold and silver outperforming by a wide margin. We maintain a broadly constructive outlook for the next two years as interest rates continue to fall, the Chinese economy stabilizes and the energy transition advances. However, our projections are subject to an unusual degree of uncertainty, specifically around U.S. trade policy under Trump 2.0 and further potential policy support in China.

Broad-based tariff increases present a clear threat to global industrial production and thus metals demand and pricing. Trump’s other proposals point to reduced support for green energy initiatives (typically metals-intensive) and wider U.S. budget deficits. The latter, combined with tariffs, could lead to higher inflation and a slower pace of Fed easing. Indeed, U.S. rate cut expectations for this year have already been trimmed in the wake of December’s strong payrolls report. Higher for longer interest rates and, by corollary, a stronger U.S. dollar are negative for metals.

On the other hand, China’s authorities may soon augment their drive to revive and reflate the economy, having already pledged a “more proactive” fiscal policy and “moderately loose” monetary policy for 2025. The big question is how far Beijing will go, as a materially stronger stimulus push could provide an upside to commodity prices. There are signs that the measures implemented thus far are having a modest effect; in the property sector, starts, completions and sales remain deeply negative on a year-over-year basis, but the latest data suggest prices may be bottoming out. However, any additional efforts to stabilize the property market will likely be targeted at clearing the overhang of pre-sold, uncompleted inventory rather than boosting new starts, and thus would be less supportive of metals demand compared with past stimulus pushes. Meanwhile, given China’s outsized share of global metals consumption and supply, the potential devaluation of the renminbi in response to tariffs would likely have a deflationary impact on USD-denominated industrial metals prices.

Aside from uranium, which has seen prices rise by 28% on average over the last five years, gold and silver once again topped the metals charts in 2024, with gains exceeding 20%. But whereas the outlook for uranium looks relatively flat (albeit, still solid), with a forecast of US$86/lb in 2025 (same as 2024) and $85 in 2026, conditions are supportive of a continued rise in precious metals. Indeed, we have raised our forecasts for gold and silver to reflect a higher risk premium amid concerns around trade wars, mounting government debt and potential inflationary pressures. Safe-haven demand and reinvigorated dedollarization trends (i.e., central bank gold purchases) should offset the headwind from the Fed’s rate-cutting pause. We now expect gold to average US$2,700/oz in 2025 (up from $2,387 last year), marking a fresh nominal high, before easing to $2,600 in 2026. Silver will likely underperform gold this year, in part due to overcapacity and ongoing consolidation in China’s solar sector, averaging US$29.00/oz (below current levels). As interest rates decline further in 2026 and the global industrial cycle accelerates, silver should rise to around $30.

On the base metals side, we have lifted our 2025 forecast for zinc on account of the tailwind from persistent tightness in concentrate availability. The dearth of raw materials is unlikely to ease given mine supply contracted again in 2024 (the fourth decline in last five years) and little, if any, rebound is expected this year. With the refined market heading for a sizeable deficit in 2025, we project the average zinc price to rise to US$1.30/lb (from $1.26 in 2024) before dropping back to $1.25 next year as mine and smelter production recover.

Meanwhile, we have trimmed our projections for copper and nickel. These metals are particularly exposed to prospects of a global trade war and shifting climate and energy policy under Trump 2.0. After copper received a leg up in the first half of 2024 from surging financial market interest around AI/data centres (currently <1% of total demand), a repeat is not expected this year, with sentiment likely hinging on tariffs and Chinese stimulus policy. Moreover, despite ongoing tightness in the concentrate market, the refined market remains well-supplied. The one wildcard is if and when the Cobre Panama mine restarts—possibly by late 2026—adding a large quantity of mine supply and keeping the market in surplus for longer. We now expect copper to edge down from US$4.15/lb in 2024 to $4.10 in 2025 (around current levels but still above the inflation-adjusted average of the last decade) and subsequently recover to $4.20 in 2026.

Despite continuing to register strong year-over-year demand growth, the outlook for nickel appears gloomier than it did a few months ago. The simple reason is oversupply—an ongoing problem that has been compounded by fears of a further deceleration in EV sales under Trump 2.0 and shifting battery technologies toward lower nickel intensities. After media reports initially suggested much deeper cuts, Indonesia (by far the largest producer) has purportedly set a nickel mining quota of 200 million metric tons (Mt) for 2025, down from the 240Mt level approved last year, but this figure could change. Actual production of ore was around 215Mt in 2024. The lower quota will present limited upside for spot prices as Indonesian smelters can import ore from the Philippines and elsewhere, and the refined market is set to remain oversupplied. We have lowered our average nickel forecasts to US$7.20/lb in 2025 and $7.80 in 2026, suggesting a slight recovery from current levels but still unprofitable levels for some producers.

Contrary to other major metals which drifted lower at the end of 2024 as the U.S. dollar strengthened, aluminum prices showed surprising resilience. Aluminum has been getting a boost from surging prices for alumina, which has fueled supply concerns as smelters are struggling to pay for this key raw material. In the coming months, alumina prices should begin to normalize, weighing on aluminum. Meanwhile, Chinese smelters have been producing and exporting record amounts of aluminum—following years of output cuts—as the authorities have not placed any restrictions on hydropower supplies given ample rainfall. However, Chinese supply growth is expected to slow as output is approaching the primary capacity cap of 45Mt per annum and the authorities have removed the export tax rebate. Globally, the market will likely flip into deficit this year amid a modest acceleration in demand, leading to a drawdown in stocks. We have maintained our aluminum price forecasts of US$1.10/lb in 2025 (in line with 2024 average but below current levels), rising to $1.15 in 2026.

Lastly, iron ore prices are due for a correction, likely falling below the US$100/t mark in 2025 (on average annual basis) for the first time since 2019. While Chinese demand for steel and iron ore is past its peak, the pace of decline over the next two years depends on what form U.S. tariffs take and whether Beijing significantly ramps up stimulus spending (particularly in residential property or infrastructure). Another key question concerns potential delays to the massive Simandou project in Guinea, which is set to become the world’s largest high-grade iron ore mine, with first shipments slated before the end of 2025. Still, the traditional major producers (in Australia, China, Brazil and India) are generally able to ration supply to keep a floor under prices. We expect iron ore to average around US$95/t in both 2025 and 2026 (vs. $110 in 2024).

Forest Products: Lumber prices were remarkably range-bound last year, though expected increases in U.S. import duties and the prospect of sharp broad-based tariff increases under Trump set the stage for a more volatile 2025. Heading into the end of 2024, benchmark Western-Spruce-Pine-Fir (WSPF) prices rebounded from their mid-year lull, averaging US$434/mbf in Q4/24 (up from $363 in Q3), as sturdy U.S. economic prospects and continued supply curtailments at Canadian sawmills helped offset demand headwinds from U.S. residential construction (i.e., poor affordability and high mortgage rates).

Meantime, the tariff threat looms large for lumber, as U.S. homebuilders rely heavily on Canadian supplies (representing about 25% of U.S. lumber consumption). Canada in turn sends a large share (well over half) of its lumber production south of the border, though those imports have been under the watchful eye of successive U.S. administrations which have levied large duties (i.e., countervailing and anti-dumping charges) on Canadian products crossing the border in support of domestic producers. Those rates, currently averaging roughly 14%, are adjusted annually and are expected to surge again this year, potentially to around 30%. Adding insult to injury, the new Trump Administration has threatened an additional 25% across all U.S. imports from Canada. Assuming the new tariffs apply to lumber, it’s unclear as to who would be responsible for paying them, though we could get those answers soon after President Trump’s inauguration. Current lumber duties are paid by the importers, though some Canadian producers have signaled that if new levies are imposed directly on exporters, they will be forced to mark up prices as an offset. Any jump in imported lumber prices would be a drag on demand from U.S. homebuilding, which is already dealing with high input costs, a lack of buildable lots and elevated mortgage rates. Still, given decent U.S. economic prospects, the expectation is that U.S. housing starts are set to rise moderately over the forecast period, though not back to the pandemic-era peaks.

While increased protectionism would support more domestic U.S. lumber production, large-scale capacity additions cannot happen overnight. Thus, trade frictions would leave the sector more vulnerable to supply shocks (i.e., wildfires, transportation disruptions, etc.). On the flip side, if demand for Canadian lumber dwindles, WSPF prices would face downside risks, though pressures would be limited by further supply curtailments and any Canadian dollar weakness. It’s also worth noting that however the cross-border trade dynamics shake out, current fundamentals do not support a return to the massive spikes seen during the pandemic era when supply was essentially shut down for a time, while demand surged. We expect WSPF to increase to an average of US$440 in 2025 and $450 in 2026. Nevertheless, this seemingly mild forecast trajectory masks what could be a period marked by increased uncertainty and volatility amid concerns that trade policies could overshadow and undercut sturdy lumber demand prospects.

Agriculture: Wheat prices, like those of most major crops, declined significantly last year and are now well below longer-run norms. For the most part, the weak pricing environment has resulted from persistently strong global production, but the strong U.S. dollar hasn’t helped. In the wheat space, most major producing regions in the Northern Hemisphere realized above-average yields again last year, which dragged prices down 12% y/y in December. Within North America, the U.S. Department of Agriculture (USDA) estimates that U.S. wheat production reached an eight-year high, while the Canadian crop turned out better than feared as drought conditions eased in parts of the prairies. Even top-exporter Russia, which at times struggled with challenging weather, managed to salvage a decent crop. Under the assumption of average growing conditions ahead, wheat prices should begin to trend somewhat higher, but it will likely take time to whittle down elevated stockpiles. Overall, wheat is expected to average US$6.10/bushel this year, up from roughly $5.70 last year, and should increase further to around $6.90 in 2026 as inventories normalize. However, wheat (and most other crops) could be expected to decline sharply if there is a major escalation in trade turmoil, given the United States’ status as a net exporter and the likelihood that retaliatory tariffs would target the farm sector.

Soybeans were among the hardest-hit crop products last year, with prices down 25% y/y in December. In the United States, a rotation away from corn and generally favourable weather across the Midwest last summer lifted production to a three-year high. The South American soybean crop is also looking large, with Brazil on track for record production and Argentina not far off. Both countries boosted the amount of acreage devoted to soybeans this year and are benefitting from favourable growing conditions. Although consumption is also growing, the USDA nevertheless expects record carry-out stocks this year, and the futures market is pricing in minimal near-term recovery. Soybean prices are now expected to average US$10.90/bushel in 2025, down from just over $11.00 last year, but should rise to around $12.20 in 2026 assuming trend yields and a shift of acreage back into corn. Soybeans are particularly vulnerable to trade frictions with China, which imports them intensively from the United States to feed its large hog herd.

Canola prices also lost ground last year, falling 13% y/y in December despite lingering drought across parts of the Canadian prairies (the world’s top exporting region) and another subpar crop in Australia. In large part, price weakness has reflected abundant supply and low prices in the soybean space, which has undermined global canola consumption. The market is also being affected by concern about China’s anti-dumping investigation against Canadian canola, and the risk that trade turmoil between the United States and China could weigh broadly on North American oilseed prices. As in the soybean space, the futures market is pricing in minimal near-term upside for canola. Overall, canola prices are now expected to average US$470/tonne in 2025, up only modestly from around $450 last year, before recovering further to around $520 in 2026.

Corn has been among the better performing crops over the past year, with prices down 6% y/y in December and the market erasing that decline in the opening weeks of January. Although growing conditions in major corn-producing regions have been mostly favourable, a reduction in the amount of U.S. and global acreage has curtailed production. With global consumption holding steady, the USDA now expects a meaningful drawdown in corn inventories this year, which is supporting prices. The recent increase in crude oil prices will also be broadly supportive of ethanol-related corn demand. Overall, the outlook for corn prices is unchanged at US$4.90/bushel this year, which would be a meaningful improvement over last year’s average of $4.25 but represents a more modest increase from current pricing of around $4.75. Gains in corn are likely to be impeded by rising acreage as farmers flee poor returns in soybeans, so the outlook has been lowered to $5.50 in 2026.

Hog prices posted an impressive recovery last year, with a 21% y/y gain in December, and are now in line with longer-term norms. Although North America’s new hog litter grew last year, slaughter has also increased significantly, which is keeping the headcount of the herd in check. On the demand side, hog consumption has benefited from persistently high cattle and beef pricing, which has led more consumers to choose alternative proteins. Overall, the hog space appears more-or-less balanced at present, as supply is well aligned with demand and pricing is at a happy medium. The outlook for the hog market is therefore unchanged, with prices expected to average US$91/cwt in 2025, up from an average of roughly $85 last year. Prices should increase further to around $96 in 2026 if herd expansion remains moderate and trade tensions remain contained (Mexico and China are important buyers of U.S. pork).

Cattle prices have continued to pierce new highs, with the market up 13% y/y in December and off to a bullish start in January. Although the drought previously afflicting much of U.S. cattle country has largely abated and feed costs have fallen significantly, herd rebuilding is taking place only gradually. Even with improved pasture conditions, North America’s new calf crop declined again last year, reflecting heightened producer caution after years of volatility. As a result, the headcount of the continental hog herd has remained in decline, and while the USDA expects it to stabilize this year, there are few signs of an imminent recovery. With supply still running tight, the outlook for cattle prices has been lifted to an average of US$185/cwt this year, little changed from $184 in 2024. Prices should ease to around $175 in 2026 as producers begin to undertake some expansion, but risk jumping if a trade war erupts within North America (the United States is a net importer of cattle and beef).

Technical Note

The BMO Capital Markets Commodity Price Index is a fixed-weight, export-based index that encompasses the price movement of 20 commodities key to Canadian exports. Weights are each commodity’s average share of the total value of exports of the 20 commodities during the period 2012-21. Similarly, weights of sub-index components reflect the relative importance of commodities within their respective product group.

The all-commodities index and sub-indices consist of the following:

Unless otherwise specified, all indices reported in this publication correspond to prices in U.S. dollars.