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Global Commodities
Outlook for 2021
November 2020
Introduction
Similar to many asset classes, commodity prices have been volatile this year primarily because of the uncertainty surrounding the global economy. The most volatile commodity proved to be crude oil, which didn’t come as a surprise considering the demand and supply-side challenges faced by the commodity since the beginning of the year. The best approach to understanding what lies ahead for commodities in 2021 is to use empirical evidence as a guideline to evaluate the prospects for different commodities.
Crude oil is likely to remain under pressure,
but the worst might be over
Without a vaccine to fight the global pandemic, global business conditions will continue to remain at below-average levels. Even though there is some positive news from Pfizer Inc. (PFE), many things could still go wrong, and the threat of Covid-19 might remain a feature of the global economy through the end of 2021 in the base-case scenario. As consumers embrace the new normal, however, reeling business sectors such as the airline industry and the cruise industry can be expected to gradually recover. This is good news for energy markets as demand coming from both these sectors dried up abruptly earlier this year. Manufacturing activities, on the other hand, are already seeing some recovery.
WTI crude oil reached a historic low in April but has recovered since then primarily due to production cuts imposed by OPEC and other oil-producing nations. These supply cuts are expected to be carried out well into 2021 as the oil cartel remains to be laser-focused on stabilizing the energy markets.
Source: The World Bank
As illustrated in the above chart, oil consumption has gradually recovered since June as well, which is a promising sign. In the best-case scenario, oil prices will stabilize around the current prices as demand slowly starts to kick in. However, a major recovery cannot be expected in 2021 as many uncertainties are surrounding the state of the global economy. A WTI crude oil barrel is currently trading around $40, and the U.S. Energy Information Administration sees average prices climb 10% higher in 2021.
A quick look at the Shiller P/E tells the same story as well.
Source: YCharts
2021, however, could turn out to be a year in which gold underperforms the broad market considering the optimistic expectations for the U.S. economy. Empirical evidence confirms equity markets have outperformed gold consistently during economic rebounds, and this is not good news for investors with an outsized position in gold.
Having said that, there’s no denying that gold adds a much-needed degree of diversification benefits to any portfolio. For this reason, the prudent decision would be to allocate a small portion of every investment portfolio to gold for hedging purposes.
Takeaway
In addition to gold, silver, and other precious metals are expected to shed some gains in 2021 according to Goldman Sachs and many other Wall Street analysts. For crude oil, the only certainty is that there will be significant volatility in prices in the year ahead as well. Average prices, however, can be expected to rise modestly considering the pace at which the global economy is beginning to return to normalcy.
About the author(s)
Harold Alby is a managing director and chief operating officer at Inova Capital. Justin Inniss is a managing director at Inova Capital.For more details on our insights please get in touch with us at Inova Capital AG on +41 415616905. Inquire about our ideas and nowcasting capabilities.
Source: U.S. Energy Information Administration
A lot will ultimately depend on how soon a vaccine would be available, but even in the best-case scenario, there would be no reason to be too excited about the prospects for this industry in 2021.
Gold has done what it does best. The cooldown will now begin
Gold is widely considered to be the best hedge against market downturns, and the precious commodity lived up to its expectations this time around as well. Gold is up 28% this year in comparison to an 11% gain of the S&P 500 index.