Back into the mosh pit: Commodity investing in 2025

Moshing, also known as slam dancing, is an intense style of dance where participants push and slam into one another, often to hardcore punk rock and heavy metal music.

This aggressive form of expression may serve as a fitting analogy for our geopolitical environment in 2025. It describes the 2017–2020 period as the US pushed allies to increase defense spending and liquid natural gas (LNG) imports while enemies were either granted a presidential visit or sanctioned.

Of course, shaking things up or thinking outside the box is not always a bad thing. But when the President-elect floated the idea of acquiring Greenland a few weeks ago, it initially sounded like the actions of an unwell person.¹

Make Greenland great again?

Greenland, located in the North Atlantic Ocean, is an autonomous territory of the Kingdom of Denmark – an ally of the US who interpreted these comments as an act of aggression. Greenland possesses significant rare earth deposits, which China has recently stopped exporting. Additionally, with the opening of Arctic shipping routes, Greenland's geographical position has become increasingly strategic. However, the territory has expressed concern over its relationship with Denmark, its former colonial ruler, citing insufficient economic support.² In his New Year speech, Greenland's Prime Minister, Mute Egede, even reiterated his desire for independence from Denmark.²

While it is unlikely that Greenland can and will be purchased like a six-pack at Buc-ees, it is surprising that no one other than the incoming president has recently reached out to Greenland to develop strategic ties further.³

That same distaste for uncertainty

The tricky part of the new administration’s creativity is that uncertainty is the one thing the market hates more than anything. Primary value from stocks comes from discounting their future cash flow within some reasonable scenarios. The more uncertain the business environment is, the wider the range of outcomes – and lower valuations may be the outcome. That's a risk with large-cap valuations on the high side of historical ranges, currently a 21.2x price-to-earnings ratio for the S&P 500 Index in a range of 11-to-23x over the last 20 years.⁴

The current upside outlier?

Commodities are one asset class that did not see large inflows that caused high valuations as a reaction to the US presidential election results in November. Since lofty valuations bubbled up to a consensus issue in mid-December, broad commodity indices outperformed the S&P 500 by 8.3%.⁵ One month is a very short time frame, and investment decisions should not be based on it. Still, it does provide a relatively current example of a diversification benefit from commodities. Since December 15, the S&P 500 Index fell 1.9%, the Bloomberg Aggregate Bond Index (US investment-grade) fell 1.0%, while broad-based commodities like the Bloomberg Commodity Index rose 6.4%.⁵ Concerns that the economy was simply not weak enough to warrant further rate cuts led to an increase in rates, which diminished the discounted present value of future earnings from public companies.

There are three hot topics in commodities in this first month of 2025 that have the potential to drive further gains: natural gas, oil, and agricultural gains.

Natural gas

Natural gas and its chilled liquid form, LNG, are primarily used for heating, cooking, and electricity generation. Over the past year, a number of our market outlooks have focused on it. This commodity’s importance is often dismissed, despite being unique in providing exposure to rising electricity demand. Natural gas prices as well as their supply and demand drivers have been topical lately.

Last year was the lowest average annual natural gas price in inflation-adjusted dollars ever reported.⁶

The low average price in 2024 follows three consecutive years of very mild winters in Europe. In the US, last year was the warmest winter in history.⁷ Low heating demand during mild winters in both Europe and the US reduced the natural gas drawn from regional storage tanks, leaving storage relatively full in spring. Less production was needed to refill storage for the subsequent winters.

All that changed for both Europe and the US this winter:

The strong area of high pressure over Greenland directed cold weather into the Eastern US from Siberia and contributed to much colder weather in Northern Europe, raising natural gas demand. As of mid-January, UK gas storage was near 50% full – about 26% lower than last year – and the EU is broadly near 66% full, a bit below normal.^8,9
Ukraine refused to renew the five-year contract to transport Russian natural gas into Europe via pipelines, so the flow halted on January 1.¹⁰
Norway is considering restricting electricity export to Europe as the high export level is raising domestic prices.¹¹
Germany began dismantling its last remaining nuclear power plant in Brokdorf as oil-fired generation surges to an eight-year high.¹²
UK Prime Minister Keir Starmer is looking into establishing an AI Energy Council to find an energy source to power future strategic artificial intelligence (AI) data center developments within the UK.¹³

Ultimately, all of these decisions factor into Europe's reduction of energy options. This forces greater reliance on LNG imports from nations such as the US, Russia, and Qatar, straining any strategic development in electrification and AI data centers.

Natural gas prices are volatile because of their dependence on weather and customer reliance on storage to fill the gap between supply and high demand during winter. The high price volatility makes it an easy commodity to underweight, theoretically reducing a commodity fund's variance and potentially improving risk-adjusted return, especially when natural gas prices are weak. The risk in that strategy is that when natural gas demand rises, the rise can be a positive contributor to performance as it is often the only commodity to capture the effects of rising electricity demand.

Oil

We remain skeptical of forecasts for considerable US oil supply growth due to a return to the president's previous term's 'drill, baby, drill' policies. Currently, the US oil production is 13.5 million BDP, which is near all-time highs.¹⁴

Private oil company production motivations have changed since Trump was last in office, and executive pay is now based on profit rather than production. We would be surprised if oil prices in the $60–70 range inspired oil production growth.

Agricultural grains

We believe investors may want to monitor agricultural grains like soybeans, corn, and wheat for price increases as the climate shifts from an El Niño to La Niña pattern. Such extreme weather conditions could bring possible drought to the US, lowering crop outputs. La Niña coincided with agricultural grain price increases in 2007, 2010, 2020, and 2021, although La Niña conditions in 2017 did not bring higher grain prices.¹⁵

Final thoughts

Investors still appear underweight commodities even in some of 2024's best performers like gold, which rose 27.2% last year.[16] That performance came despite ETF investors ending the year holding 2.7 million ounces of gold less than they held in January.[16] When an industry icon like Howard Marks recently issued a recent memo titled “On Bubble Watch” it grabbed our attention.[17] While we may disagree with a few of his points, a quick read should inspire a review of portfolios for an appropriate level of diversification given the uncertainty. Finally, if investing in the head-banging mosh pit environment isn't exciting enough, there’s always stage diving. We’ll watch from here.

¹ "Trump wants to buy Greenland again. Here’s why he’s so interested in the world’s largest island." CNN, January 2025. https://www.cnn.com/2025/01/07/climate/trump-greenland-climate/index.html.
² "Greenland's leader steps up push for independence from Denmark." Reuters, January 2025. https://www.reuters.com/world/greenlands-leader-steps-up-push-independence-denmark-2025-01-03/.
³ Buc-ee's is a chain of country stores, gas stations, and electric vehicle charger stations predominantly located in Texas and surrounding Southern US states.
⁴ "Stock Market P/E Ratios." Yardeni Research, January 2025. https://yardeni.com/charts/stock-market-p-e-ratios/.
⁵ Bloomberg, December 15, 2024–January 15, 2024: S&P 500 Index return = -1.96%; Bloomberg Commodity Index return = +6.43%; Bloomberg Aggregate Bond Index return = -1.04%.
⁶ "Spot Henry Hub natural gas prices hit a historic low in 2024." Today in Energy. U.S. Energy Information Administration, January 2025. https://www.eia.gov/todayinenergy/detail.php?id=64184#.
⁷ "The U.S. had its warmest winter on record." National Oceanic and Atmospheric Administration, March 2024. https://www.noaa.gov/news/us-had-its-warmest-winter-on-record.
⁸ "Britain's gas storage levels are worryingly low, Centrica says." Reuters, January 2025. https://www.reuters.com/business/energy/britains-gas-storage-levels-concerningly-low-centrica-says-2025-01-10/.
⁹ "European Gas Prices Surge on Supply Fears, Storage Withdrawals." MarketWatch, January 2025. https://www.marketwatch.com/story/european-gas-prices-surge-on-supply-fears-storage-withdrawals-af602d90.
¹⁰ "Ukraine halts transit of Russian gas to Europe after a prewar deal expired." Associated Press, January 2025. https://apnews.com/article/russia-ukraine-war-gas-transit-supplies-gazprom-7775fea34a7be9723b991d835a7ebd6f.
¹¹ "Norway aims to cut energy links with Europe due to soaring prices." Euronews, December 2024. https://www.euronews.com/business/2024/12/13/norway-aims-to-cut-energy-links-with-europe-due-to-soaring-prices.
¹² "Final German nuclear power plant enters dismantling phase." World Nuclear News, December 2024. https://world-nuclear-news.org/articles/Final-German-nuclear-power-plant-enters-dismantling-phase.
¹³ "Could Keir Starmer’s AI dream derail his own green energy promise?" The Guardian, January 2025. https://www.theguardian.com/technology/2025/jan/14/keir-starmer-ai-labour-green-energy-promise.
¹⁴ "Weekly Petroleum Status Report." Petroleum & Other Liquids. U.S. Energy Information Administration, January 2025. https://www.eia.gov/petroleum/supply/weekly/.
¹⁵ Bloomberg, September 30, 2000–November 30, 2024: El Niño/Southern Oscillation (Pacific Ocean temperature deviation), Bloomberg Agricultural Grains Index.
¹⁶ Bloomberg, December 31, 2023–December 31, 2024: Gold price returns, ETF industry gold holdings in ouces.
¹⁷ Marks, Howard. "On Bubble Watch." Oaktree Capital Management, January 2025. https://www.oaktreecapital.com/insights/memo/on-bubble-watch.

Important information

An investor should consider the investment objectives, risks, charges and expenses of the Funds carefully before investing. To obtain a prospectus containing this and other important information, call 844-ETFs-BUY (844-383-7289) or visit www.abrdn.com/usa/etf. Read the prospectus carefully before investing.

Fund Risk: There are risks associated with investing including possible loss of principal. Commodities generally are volatile and are not suitable for all investors. There can be no assurance that the Fund’s investment objective will be met at any time. The commodities markets and the prices of various commodities may fluctuate widely based on a variety of factors. Because performance is linked to the performance of highly volatile commodities, investors should consider purchasing shares of the Fund only as part of an overall diversified portfolio and should be willing to assume the risks of potentially significant fluctuations in the value of the Fund.

The Fund employs a “passive management” – or indexing – investment approach designed to track the performance of the Index. The Fund will generally seek to hold similar interests to those included in the Index and will seek exposure to many of the commodities included in the Index under the same futures rolling schedule as the Index. The Fund will also hold short-term fixed-income securities, which may be used as collateral for the Fund’s commodities futures holdings or to generate interest income and capital appreciation on the cash balances arising from its use of futures contracts (thereby providing a “total return” investment in the underlying commodities).

Through holding of futures, options and options on futures contracts, the Fund may be exposed to (i) losses from margin deposits in the case of bankruptcy of the relevant broker, and (ii) a risk that the relevant position cannot be closed out when required at its fundamental value. In pursuing its investment strategy, particularly when rolling futures contracts, the Fund may engage in frequent trading of its portfolio of securities, resulting in a high portfolio turnover rate.

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During situations where the cost of any futures contracts for delivery on dates further in the future is higher than those for delivery closer in time, the value of the Fund holding such contracts will decrease over time unless the spot price of that contract increases by the same rate as the rate of the variation in the price of the futures contract. The rate of variation could be quite significant and last for an indeterminate period of time, reducing the value of the Fund.

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To the extent the Fund is exposed directly or indirectly to leverage (through investments in commodities futures contracts) the value of that Fund may be more volatile than if no leverage were present.

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