Where are Global Oil Prices Headed?

Abstract

Almost all commodity prices recovered in the third quarter of 2020 following steep declines earlier in the year due to the COVID-19 pandemic. Crude oil prices have doubled since their April low, supported by sharp oil supply cuts by OPEC+, but prices remain one-third lower than their pre-pandemic levels. This paper uses a mix of quantitative data; scenario-based economic modeling and posits two scenarios for oil prices. Scenario 1: The first scenario – equally our base case – suggests that oil prices recover strongly as countries begin inoculating their citizens. So far, more than 1.3 billion vaccine doses have been administered worldwide, equal to 17 doses for every 100 people. Meanwhile, the impact of fiscal transfers, wage subsidies and measures to accompany an economic recovery will provide the basis for higher oil demand in 2021, leaving oil prices to oscillate in the $50 - $55/bl. Our optimism rests on the fact that the majority of fiscal and monetary responses will redress the economic shock posed by the virus, while a gradual reopening of borders will support economic activity. Meanwhile, deferred demand and record-low interest rates will support credit growth, consumption, and oil-driven economic activity such as travel and retail spending. Scenario 2: The second scenario is less benign and is a closer reflection of market trends, symptomatic of the exogenous shock posed by COVID-19 and structural shock latent in the energy transition. This scenario outlines the demand implications of current measures singed to attenuate the worst effects of the virus, whilst outlining the implications of a faster transition of renewable energy in a post-COVID scenario. There are numerous challenges associated with forecasting global commodities during such an uncertain tie, for that reason, we relied both on structural trends, such as legislation for carbon neutrality, the extent and implications of fiscal stimulus across advanced economies as well as lessons for post-WWII structural adjustment.