Barclays sees 30% to 60% commodity price swings from super El Niño

Barclays expects the strongest El Niño on record in 2026 to trigger a multi-phase commodity trade spanning energy, tropical agriculture and metals.

Palm oil, coconut oil and natural rubber prices may rise 30% to 60% within 18 months if the 2026 El Niño event matches forecasts as the strongest on record, while oil and gas prices face headwinds from an expected warm Northern Hemisphere winter, according to a Barclays cross-asset research report published July 21.

"The sequential nature of El Niño's impact — energy first, tropical agriculture second, metals last — creates a phased trading calendar for commodity investors," the Barclays commodities research team wrote in the report.

The report divides commodity responses into three tiers. Energy prices react fastest but in the opposite direction: European natural gas prices historically trade 9% to 28% below trend during El Niño events as warm winter conditions cut heating demand, while crude oil trades 5% to 30% below trend. Tropical agricultural commodities show the strongest upside, with palm oil prices rising about 26% in the 12 months after a strong El Niño and nearly 40% after 18 months, based on historical analysis. Coconut oil prices have gained 33% in the 18 months following strong events, with extreme events producing 50% to 60% gains. Natural rubber (RSS3) prices rise 15% to 20% after strong El Niño episodes, the report said.

The 2026 event carries outsized risk because the El Niño index may reach +3 to +4, exceeding the 2015-16 peak of +2.8 that drove a 16% drop in US heating degree days and triggered 300,000 tonnes of aluminum capacity cuts in China's Yunnan province. A repeat of the 20% production cut scenario would put about 1.3 million tonnes of aluminum at risk, equivalent to 1.7% of global supply, with price effects typically materializing one to two years after the event.

Palm Oil Leads Tropical Agriculture Exposure

Indonesia and Malaysia account for nearly 90% of global palm oil supply, making the crop the highest-conviction El Niño trade in Barclays' framework. The Malaysian Palm Oil Board estimates an average El Niño reduces output by about 3% and inventories by 2.5%, pushing prices roughly 10% higher. For the current forecast event, the report notes that palm oil prices tend to trade below trend during the El Niño itself, meaning the early phase represents an entry window rather than the peak return period.

Coconut oil production is concentrated in the Philippines and Indonesia. The US Department of Agriculture estimated the 2024 El Niño cut Philippine coconut oil output by nearly 12%. Natural rubber faces similar supply pressure: Thailand, Indonesia and Vietnam — which together account for the majority of global supply — saw output fall about 10% and 15% respectively during the 2023-24 El Niño, as heat and drought reduced latex flow and shortened the tapping season.

Aluminum and Copper Face Lagged Supply Risks

Aluminum carries the clearest signal among industrial metals because of China's Yunnan province, which hosts about 660 million tonnes per year of primary aluminum capacity — roughly 9% of global output. The province relies on hydropower for 60% to 70% of its electricity, and El Niño systematically weakens the Bay of Bengal summer monsoon, reducing reservoir levels. The 2023-24 drought forced about 1.15 million tonnes of capacity cuts. A similar 20% reduction in the current cycle would put 1.3 million tonnes at risk.

Copper's exposure is more ambiguous. Chile's northern regions — Atacama, Antofagasta and Tarapaca — concentrate about 420 million tonnes per year of copper capacity, or 17% of global supply, and were hit by severe flooding during the 2015 El Niño. However, Barclays found the statistical relationship between copper prices and El Niño to be weak, with macroeconomic conditions, Chinese demand and energy-transition investment exerting far greater influence on the red metal.

The report cautioned that historical price patterns reflect statistical regularities rather than predictions, and that individual events can diverge significantly depending on macro conditions, supply-demand fundamentals and geopolitical factors. It also noted that La Niña — the cooling phase that often follows strong El Niño events — has historically produced clearer commodity price signals than El Niño itself, particularly for sugar and energy markets.

This article is for informational purposes only and does not constitute investment advice.