Citi Warns of 'High-Frequency Black Swan' Era in Commodity Markets by 2026

Original author: Bao Yilong

Source: Wall Street Journal

Amid the convergence of geopolitical, climate, and technological shocks, Citi believes that "black swan" events in commodity markets are evolving from once-in-a-decade occurrences to near-constant realities.

Wind Rider Trading Platform news: On July 23, the Citi Research team led by Eric G. Lee released a report outlining potential extreme risk scenarios for the second half of 2026 and beyond, with price shocks so severe they could render traditional supply and demand analysis frameworks ineffective.

Citi's research-covered tail risk scenarios include: the U.S.-Iran conflict evolving from a temporary shock into a prolonged, multi-year disruption; a race to hoard critical minerals; gold first dropping 15% to 20% before doubling; extreme El Niño weather disrupting agricultural markets; and AI bubble bursts or sustained boom triggering bidirectional volatility.

Since 2020, the commodities market has experienced an unprecedented density of extreme events, including the COVID-19 pandemic, the Russia-Ukraine conflict, trade wars, a central bank gold-buying surge, and recurring Middle East conflicts.

The report states that these risk scenarios are not base-case forecasts, but rather "tail scenarios that could occur and would have a significant impact if they do," designed to complement Citi's existing baseline scenario forecasting framework.

Citibank has listed the escalation of U.S.-Iran tensions as the most impactful tail scenario, despite assessing its probability as "low."

The report notes that since the "12-Day War" in June 2025, when the U.S. and Israel jointly targeted Iran's nuclear facilities, through the resumption of conflict in February 2026, the signing of a fragile ceasefire agreement in June 2026, to the renewed military escalation in July 2026, oil and refined product prices have undergone multiple rounds of sharp fluctuations.

If the conflict escalates further, Iran may target the energy infrastructure of oil-producing countries in the Gulf region, and combined with a prolonged closure of the Strait of Hormuz and disruption of the Bab el-Mandeb Strait, the world could face a sustained supply gap of 5 to 10 million barrels per day.

Citigroup estimates that, under the assumption of a demand elasticity of approximately -0.05, such a level of supply loss would drive oil prices up by 100% to 200%, pushing crude prices above $200 per barrel and keeping U.S. retail gasoline prices above $6 per gallon.

The report cites historical data showing that when global oil inventories, excluding China, fell below a 70-day coverage level, the actual Brent price reached over $150 per barrel.

In the past, when crude oil inventories outside China fell to a 90-day low, Brent crude reached over $150 per barrel.

If oil and gas expenditures were to rebound to the 8% peak of the 1970s oil crisis as a share of GDP, the required oil price would exceed $200 per barrel.

If inventory levels outside China fall to levels seen in the late 1970s, petroleum product prices would roughly double from current levels.

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

Citibank rates the likelihood of stricter restrictions on Russian energy exports as "medium probability," emphasizing that the impact on the natural gas market will be greater than on crude oil.

In liquefied natural gas, Russia exported approximately 44 billion cubic meters in 2025, accounting for about 7% of global LNG supply, primarily from the Yamal LNG and Sakhalin 2 projects.

Most of the Yamal project's liquefied natural gas exports go to Europe, and Europe's share will increase further by 2026.

More than 70% of Sakhalin 2 exports flow to Japan and South Korea; approximately 90% of Yamal project exports in mid-2026 are directed to Europe.

Japan and South Korea together account for approximately 70% of the LNG export share from Sakhalin 2.

If a global ban on Russian LNG is implemented, more than 30 billion cubic meters of annual supply will need to be redirected, but shipping and contractual constraints will create a significant supply gap in the global LNG market.

In terms of pipeline natural gas, due to physical constraints of the pipelines that make it difficult to adjust the direction of gas flow, the ban on purchasing Russian pipeline gas has even greater disruptive impact.

Russia exports more than 70 billion cubic meters of pipeline gas annually to markets outside China, with Europe and Turkey together importing approximately 37 billion cubic meters.

Citibank rates the likelihood of a critical mineral hoarding race as "high," with impacts varying by commodity and extent of hoarding. If governments significantly accumulate strategic mineral reserves, copper prices could be pushed above $20,000 per ton.

The report notes that policy signals have already emerged in major global economies such as the United States and the European Union.

The U.S. "Project Vault" proposal plans to spend $12 billion to stockpile critical industrial goods, while the EU has announced €3 billion in funding for critical mineral security.

Citibank calculated using the copper market as an example: to increase global refined copper inventories from the current level of approximately 1.3 months of consumption to three months, about 4 million tons of copper would need to be accumulated over two years.

Based on the historical elasticity of scrap copper supply, this would require copper prices to rise to approximately $23,000 per ton. Currently, the Citi baseline scenario projects copper prices at around $13,500 per ton.

Theoretical copper prices under various global inventory increase scenarios

Citibank rates gold's tail risk as low probability and low direct impact, but significant within a scenario analysis framework.

After surging from $2,500 per ounce in January 2025 to a peak of $5,500 per ounce in February 2026, gold prices have since retreated to around $4,000 per ounce.

The report suggests that the risk of downside surprises is most concentrated over the next 4 to 6 weeks, and a break below $3,800 per ounce could trigger widespread liquidations of ETFs and leveraged positions.

Potential triggering factors include: deterioration in the Middle East situation driving up real interest rates and the US dollar, and market adjustments in equities and bonds triggering a liquidity crunch.

However, the report remains highly optimistic about the medium- to long-term outlook for gold.

China’s trade surplus of over $1.3 trillion, continuous central bank accumulation, global concerns over fiscal sustainability, and the trend toward de-dollarization collectively provide multiple supports for long-term gold demand.

Citibank expects gold to rise to $6,000 per ounce over the next few years, nearly doubling from current levels, driven by major inflation declines and renewed investor buying.

The July update from the National Oceanic and Atmospheric Administration (NOAA) raised the probability of an extremely strong El Niño event to 81%, with a 97% chance it will persist until spring 2027. Citigroup has categorized this as a "moderate probability, high impact" tail event.

(El Niño probability forecast by the U.S. NOAA)

The report indicates that extreme El Niño events have significantly different impacts on various agricultural products. Cocoa, sugar, and robusta coffee are most affected; soybeans are moderately affected; corn and wheat are relatively less affected.

If a Harmattan wind similar to the 2023–2024 season occurs in West Africa, cocoa supply will be severely impacted, potentially pushing cocoa prices back to $10,000 per ton or higher, after previously reaching record highs in 2024–2025.

Regarding sugar, lower-than-average rainfall in India in June, combined with potential monsoon deficiencies and flooding risks in Thailand and Brazil, could push global sugar prices above 20 cents per pound.

Corn and soybean prices have received some support as El Niño typically boosts production in U.S. growing regions, while European heatwaves and weakened monsoons in India remain the primary downside risks.

Citibank characterizes the impact of AI scenarios on commodities as "low to medium probability, highly differentiated effects."

The expansion of AI infrastructure is becoming a major driver of demand for electricity, natural gas, uranium, and grid metals such as copper and aluminum, with the report projecting that U.S. data center electricity consumption will nearly double by 2030.

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

At the same time, a weaker U.S. dollar may provide passive support to commodity prices, and significant rate cuts by the Federal Reserve will also provide some floor to the market.

If the productivity gains from AI materialize, accelerated energy consumption and earlier grid investments will further reinforce the structural supply gap narrative for copper and aluminum, with Citibank viewing this as one pathway for copper prices to reach $17,000 per ton in a bullish scenario.

Gold is considered the most asymmetric hedge tool in an AI scenario, with a clear benefit logic in both boom and bust conditions.

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

The pipeline has an annual gas transmission capacity of 50 billion cubic meters, and if it begins operations around 2030, it will significantly reduce China’s LNG import demand, further exacerbating an already anticipated oversupply in the global LNG market starting from 2028.

The report forecasts that under this scenario, the JKM Asian LNG benchmark price could fall to $5 to $6 per million BTUs, significantly below the current forward prices of over $8 for 2029 to 2030, and well below the break-even range of $7 to $10 for most new LNG supply terminals.

Citigroup noted that the potential additional supply of 50 billion cubic meters per year between China and Russia is nearly equivalent to Russia’s current pipeline exports to Europe of approximately 53 billion cubic meters per year, and its impact on the global LNG surplus will far exceed the debate over whether Russian pipeline gas returns to Europe.

If the United States pushes the Monroe Doctrine to an extreme and blocks oil exports from Latin America and the entire Americas, the global oil price structure will be severely distorted.

The Monroe Doctrine is a core U.S. foreign policy introduced in 1823, asserting that “America for the Americans” to oppose European powers' interference in the Americas, while declaring that the United States would not interfere in European internal affairs.

Citibank lists "the United States blocking all oil exports from the Americas" as a low-probability, high-impact scenario.

Under this assumption, the region's crude oil production of approximately 9.8 million barrels per day in Latin America (including Mexico), accounting for about 10% of global output, would be cut off from global markets, with an impact equal to or even greater than the 1973 Arab oil embargo.

(U.S. imported crude oil prices, real and nominal values, 1974–2025)

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

Under this scenario, global crude oil benchmarks such as Brent and Dubai could surge above $100 per barrel, while regional Americas benchmarks such as WTI and WCS could plunge by more than $30 per barrel due to lack of export outlets, creating a sharp regional price divergence.