Factoring a vaccine into our 2021 forecasts

  • The prospect of effective COVID-19 vaccines has prompted us to raise our forecast of global economic activity in 2021, which has positive implications for commodity demand. We think oil demand and prices, in particular, will rise sharply next year. But the current rally in industrial metals prices should fizzle out.
  • The increased likelihood that a successful vaccine is rolled out has led us to revise up our world GDP growth forecast to 6.8% in 2021. The positive effect will be felt most in advanced economies, while China could lose out from a shift in spending from goods back to services. (See our Global Economics Update.)
  • While most commodity prices plummeted in March-April in the wake of COVID-19 and measures to contain it, metals and agricultural commodity prices have now more than made up the lost ground. (See Chart 1.) However, oil prices have struggled to recover, as demand has stagnated owing to homeworking and curbs on travel. Accordingly, we think oil will be the main beneficiary of an effective vaccine.
  • We have raised our oil demand forecasts for 2021 and now forecast that oil demand in Q3 2021 will be higher than in Q3 2019. There is considerable pent-up demand for travel, leisure activities and holidays in the developed world. Meanwhile, on the supply side, we expect OPEC to maintain production restraint next year so that the market is likely to remain in a small deficit (see Chart 2) and stocks will be drawn down. As a result, we have revised up our end-2021 oil price (Brent) forecast to $60 per barrel. (See here.) However, the 2021 surge in demand is likely to prove a one-off and by 2022, we expect prices to slip back.
  • We are also positive on the outlook for the price of gold in 2021 – despite its recent slide – as we expect US real yields to fall a little next year, and the US dollar to depreciate a touch.
  • By contrast, we expect industrial metals prices to ease back over the course of 2021. While the pick-up in global economic activity is good news for metals too, we think that the positive impact will be more than offset by the hit to demand from the gradual withdrawal of fiscal stimulus in China and by lower growth in China’s goods exports. Metal supply is also likely to revive next year, as mines re-open. (See here.)
  • And finally, the vaccine is positive for demand for many agricultural commodities. All else being equal, the rise in oil consumption should result in higher demand for agriculturals used to make biofuels (corn, sugar, palm oil). And the more “luxury” agriculturals (coffee and cocoa) should benefit from an opening up of hospitality industries. However, the recent surge in prices and higher supply in 2021 suggest that most agricultural prices will still end the year lower. (See our forthcoming Update.)
  • In a nutshell, the prospect of a vaccine has improved the outlook for commodities demand, but oil and other commodities associated with the travel and leisure industries will be particular beneficiaries.

Chart 1: S&P GSCI Commodities (100 = 1st Jan. 2020)

Chart 2: Oil Market Balance (Mn. BpD)

Sources: Refinitiv, Capital Economics

Sources: OPEC, IEA, Capital Economics


Caroline Bain, Chief Commodities Economist, +44 (20) 7808 4055, caroline.bain@capitaleconomics.com

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