Recently, we’ve seen a significant decline in global commodity prices, both in the last few weeks and even more so in the last few days, with oil most notably reaching a four-year low, having profound implications for businesses in the United Arab Emirates (UAE).
While the tariff policies announced by President Donald Trump on the 4th of April have, undoubtedly played a role in this downturn (and will continue to do so), several other factors are also influencing commodity prices.
So, what else has caused this monumental drop, and what does the significantly lowered commodity prices mean for businesses in the UAE?
Trump’s Tariffs and Their Influence on Commodity Prices
In early April 2025, President Trump announced a series of tariffs supposedly aimed at addressing trade imbalances on a global scale. These included a baseline 10% tariff on all imports, with higher rates for specific countries – initially, 34% on Chinese goods (which has now increased to a whopping 125%), 20% on European imports and 24% on Japanese products. These measures led to significant market volatility, particularly in the commodities sector.
For instance, oil prices experienced substantial fluctuations following the tariff announcements. Brent crude dropped below $60 per barrel for the first time since February 2021, driven by fears of a global economic slowdown resulting from escalating trade wars, especially with China.
Similarly, copper prices, which had fallen by 16% from record highs due to concerns over reduced demand, saw a rebound after a temporary 90-day pause on tariff hikes.
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Additional Factors Influencing Commodity Prices
Beyond the impact of tariffs, several other elements are contributing to the current decline in commodity prices.
Global Oil Surplus
The World Bank’s Commodity Markets Outlook from October 2024 projected a significant oil surplus, with supply expected to exceed demand by an average of 1.2 million barrels per day in 2025. Of course, whenever supply is greater than demand, basic economics dictates that prices will drop.
Indeed, this surplus is anticipated to drive oil prices to their lowest levels in five years, despite ongoing geopolitical tensions.
Supply Chain Disruptions
Ongoing supply chain challenges, including labor shortages and logistical bottlenecks, have disrupted the production and transportation of various commodities. These disruptions have led to decreased supply and increased volatility in commodity markets.
Extreme Weather Events
Unprecedented weather conditions have adversely affected the production of key commodities. For example, severe droughts and floods have impacted agricultural yields, leading to supply shortages and price fluctuations in markets such as cocoa and orange juice.
Geopolitical Instability
Conflicts and tensions in various regions have disrupted supply routes and production facilities, further exacerbating commodity price volatility.
For instance, conflicts in the Middle East have raised concerns about potential disruptions to oil supply chains, and this will most likely continue to be a problem in years to come.
Impact on the UAE’s Oil and Gas Sector
The UAE’s economy is heavily reliant on oil exports, making it particularly sensitive to fluctuations in oil prices.
The recent drop in oil prices, influenced by the aforementioned factors, poses challenges for the country’s oil and gas sector.
Reduced revenues from oil exports can lead to budgetary constraints, potentially affecting public spending and investment in infrastructure projects.
Effects on Non-Oil Sectors
The UAE has been actively diversifying its economy to reduce dependence on oil revenues. But, the non-oil sectors are definitely not immune to the ripple effects of declining commodity prices and global economic uncertainties.
For example, the real estate industry may face increased costs for construction materials, whose prices are affected by supply chain disruptions and shifts in global supply and demand dynamics. This is pretty significant, given the size and significance of the industry in the UAE.
Stock Market Reactions
Financial markets in the UAE have responded to the global economic uncertainties stemming from the factors influencing commodity prices.
Of course, investor sentiment is closely tied to the performance of the oil sector, and prolonged periods of low commodity prices can lead to reduced market capitalisation for energy companies.
This scenario may prompt portfolio reallocations and a cautious approach to equity investments within the region.
Consumer Spending and Inflation
Commodity prices play a pivotal role in shaping inflationary trends and consumer spending behaviors. In the UAE, fluctuations in oil prices can influence transportation and production costs, subsequently affecting the prices of goods and services.
While lower oil prices might reduce costs in certain areas, the overall impact on consumer prices is complex and influenced by various factors.
Opportunities Amidst Challenges
Despite the challenges posed by declining commodity prices and escalating trade tensions, there are still potential opportunities for UAE businesses – it’s not all doom and gloom.
- Diversification Acceleration: The current scenario highlights the importance of economic diversification. Businesses may expedite efforts to explore and invest in non-oil sectors, reducing vulnerability to oil price volatility.
- Cost Management: Lower commodity prices can lead to reduced operational costs for industries reliant on raw materials. Companies can leverage this to improve profit margins or offer competitive pricing.
- Strategic Investments: Periods of lower commodity prices may present opportunities for strategic acquisitions and investments, particularly in sectors poised for growth in a diversified economy.
Ultimately, the decline in global commodity prices, influenced by a confluence of factors including recent tariff policies, supply chain disruptions, extreme weather events and geopolitical instability, presents a multifaceted challenge for UAE businesses.
While immediate financial pressures are evident, the situation also offers a catalyst for economic diversification and strategic realignment.
By focusing on operational efficiency, exploring new markets and adapting to the evolving economic landscape, UAE businesses can navigate the current downturn and position themselves for sustainable growth in the future.
