Month End Summary of Commodity Futures and Options

“The policy gamma generated by the current President shows no signs of ebbing.”

If anyone expected the gamma to slow down, it hasn’t. The chaos is everywhere and shows nary a sign of slowing. The Middle East has shown the world it too can create more history than the rest of us care to consume. Israel decided to bomb and attack its Shiite competitor. The US President was on all sides of “we didn’t know/we knew and approve”. Perhaps this is some attempt at policy ambiguity, or it is grandstanding and an attempt to defuse the fact that America’s greatest ally neither sought approval nor gave DC warning. Iranian bluster hit nuclear levels, but they did succeed in exacting some price against Israel.

While propaganda is very thick, neither THAAD, Patriots, David’s Sling nor Iron Dome were 100% successful. Even when only a few leakers make it through, the results can be devastating to an industrialized and urban population. More than “a few” Iranian missiles succeeded in making it through. The two week war (a bit longer than the 7 Day War, and less conclusive) ended in what looks like a highly scripted “bombing” of Iranian nuclear facilities. While the Israeli attack and Iranian counterattacks seemed genuine, the last bit of bombing seemed like the sort of thing that would happen in American Professional Wrestling. The bombing was all but telegraphed, and as anticipated as the suicide of Socrates. Tactically, the situation looks like a draw. The Iranians did not rise up against their leaders. The initial strikes succeeded in killing a good deal of the Iranian military leadership, but after a long initial blink, they did fight back. The initial triumphal talk faded as Iranian missiles kept streaking in. Iran also showed a fundamental weakness in their defense. They fell victim to roving Israeli teams who targeted Iranian installations with short range anti-tank weapons. The fact that Israel so easily targeted the military elite suggests all sorts of leaks and a successful espionage effort on the Israel’s part. The US comes out looking strangely inept or duplicitous. If the US was unaware of Israel’s plans and the real reason for the timing of those attacks (so close to a purported breakthrough in talks), then the US leadership was foolish. If it was aware, then nobody would assume American good faith when they negotiated with the US.

Oil volatility, as one might expect, spiked as the tit-for-tat exchanges continued. Implied volatility jumped, but realized vol lagged dramatically. We’ve speculated that the market has changed dramatically post COVID. It might be the increased participation of renewable resources in the gen stack, the greater usage of electric cars, the broader diversification of oil sources (from shale, Russian, Kazakh and Azeri sources) or fundamental weakness in the “world’s Factory” aka China.

While the x-Axis is labeled generically, June 2025, we see that over the month implied vol shot up the second week and held. However, after the US bombing and the “ceasefire”, it quickly plummeted.

It is hard to expect sanity to return to that part of the world. All sides will use the ceasefire to fix mistakes uncovered in the fighting. There is also the ongoing fighting in Gaza which festers. Uncertainty has probably increased in the world energy market, but good luck holding a long premium position waiting for the next flare up.

Uncertainty is also de rigueur in the US government budget negotiations and the tariff talks. On the budget, as of the time we are writing this, the House and Senate bills differ by a paltry 1 Trillion dollars. In either case, the debt will continue to explode unhindered. While Trump rode a wave of outcry at the excesses of government, they seem to have forgotten that the current President presided over many of those excesses. The current spending bill is at odds with candidate Trump (prior to his first term), but very consistent with the profligate spending in the 1st Trump administration. Trump seems to have turned up his ire at Chairman Powell. While we are no supporters of the Federal Reserve, Powell seems to be trying to thread a needle. The increased federal borrowing is sure to keep a floor under rates. First, private savings (to the extent it exists) must be enticed into the government bond market. To lure the marginal saver, the rates must go up. Secondly, the Fed cannot indiscriminately buy bonds. Without some sort of sterilization (they sell something), the money supply would grow. This will have knock-on effects to inflation. While Trump can huff and puff at Powell, the market sets the rates. If the Fed puts downward pressure on rates, fewer private savings will participate, forcing it to buy more bonds. A real estate developer lives and dies with leverage and credit, so they will always see reasons to lower rates and loosen standards.

The trade deals that are announced fait acompli seem to be lagging. There are only two signed tariff deals according to the major media outlets. At the time of writing, negotiations with Canada were ended and the US was on track to deliver massive tariffs. One problem with all of these negotiations is the uncertainty they engender. They go from done to trade war in the space of one week. Concluding a deal with a major economic power like Japan or China might under normal circumstances, would be a year to decade long process. Each side has a panoply of demands and interest groups to sate. One or two such deals might require the attention of the entirety of a President’s term in office. When the President announces a “deal” after a couple of talks, it begs credulity. It is also a bit rich to cry foul at the existing trade deals when the US (and Europe to some extent), instituted and wrote the rules at the world Trade Organization. At the height of US economic and military power, it was American policy “wonks” who wrote NAFTA. We are now told to believe that the Mexicans and Canadians out negotiated and hoodwinked the US? The people who wrote the rules are crying that they are unfair? It might play to the backwaters of the American empire, but we are skeptical that Beijing or Delhi will see it so clearly.

To summarize, we have a tenuous ceasefire in the Middle East which makes the US look like it was either impotent or culpable. The US attack has shown cracks in the President’s domestic support. People are questioning his motives. Interest rates have been a lot higher for a lot longer than any of the forecasters have predicted. President Trump is arguing for a 1% rate when we are at highs in most speculative assets. The trade deals have succeeded in only muddying the water. All of the talk of improving government efficiency is gone. In many ways, the current administration reminds this author of a more cartoonish version of the “Contract with America” in the 1990s. The Republicans made a lot of noise about rationalizing an out of control bureaucracy, but only succeeded in making it more colossal.

FX was mixed this month. Cryptos were bifurcated, with Ethereum futures down and Bitcoin up. Bitcoin vol was down significantly. Ethereum vol was also offered. The trend has been to lower vol in either case. It could be that the listed futures markets have matured the market and caused speculative interest to erode. In a little bit of a reversal, Yen vol was offered dramatically.

We discussed the Trump/Powell grudge match. Futures were bid across the board and in magnitudes proportional to their duration. Oddly enough, the 10Year vol was quite strong this month. In past missives, we've pointed out that the last Fed rate cuts were met with increased 10 year yields. Trump's desire for 1% rates is as plausible as his promises to eliminate the personal income tax.

Equity indexes show no signs of concern. Neither wars in the Middle East, millions of student loans set to enter garnishment nor 10 year rates stubbornly north of 4% has made any dent. Major US equity index futures were up 4-6% this month, across the board. SP500 vol was offered as was the VIX. Unlike oil, it doesn't seem like the Mid East or profligate spending bill has had any negative effects on equities. The AI craze is still in full effect. The markets are enamored with the flash of AI and the mundane, like the need for more data centers. With equity indexes hitting new highs, it is a bit concerning that anyone would suggest rates are too high.

Gold took a break this month. It was down for the first time in a while. The big moves were in platinum and palladium. Both metals also had a strong sharp bid in volatility. The speculative demand for these metals is hard to understand. While there is some small numismatic demand for either and jewelry, they are mostly industrial metals. As we've shown in some simple regression work (https://commodityvol.com/aux/doc/WEB/WEBSCROLL/WEB/SilverGold/), the people who approach these metals from the relative scarcity angle might be disappointed. Perhaps speculators are betting that inflation will hit all these metals similarly (in percentage terms) and the platinum move is filling in a gap. Copper rallied on both the LME and COMEX on lower vol. A strong copper price is probably consistent with renewed Chinese buying, perhaps it was a stockpiling effort. Further strength in the metal would be consistent with a rebound in Chinese manufacturing.

Bean oil was up solidly last month. This month, the futures rallied while vol receded. Soy meal was down, but vol was up for meal and beans. Corn in Chicago was down on surging vol, but up in Paris on reducing vol. Meats were up across the board. Live cattle vol also surged. It is surprising that given the trade deal limbo, vol is not up across the board. Finally, timber rallied on lower volatility. There seems to be a good bit of bifurcation in the real estate market. Housing starts and permits were lower. This is consistent with new home sales slumping, although existing home sales increased. It does seem like rationalization has started in real estate markets. If there is a rush to get the existing partially finished homes to completion, it would explain the stronger timber prices on weaker vol.

With the exception of ethanol, almost everything was up on the month. Both WTI and Brent futures ended up on the month, on lower vol. Heating oil was up on stronger vol. There are some supply concerns here, although we are a few months from fall demand mattering. Again, the overwhelming feeling is relief. Prices could have been much higher and vol as well. The Straits of Hormuz was not shut down. It doesn't seem like loading facilities in Iran were too badly hit. Trump made some statements about 'allowing' China to buy Iranian oil again. We wait for the next shoe to drop in this drama.

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