October 22, 2020 / 08:58 PM / By World Bank Group / Header Image Credit: World Bank Group
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. Metal prices recovered rapidly in response to a faster-than-expected pick up in China's industrial activity. Some food prices have also risen due to production shortfalls in edible oils.
Looking ahead, oil prices are expected to increase very gradually from current levels and average $44/bbl in 2021, up from an estimated $41/bbl in 2020, as a slow recovery in demand is matched by an easing in supply restrictions. Metal and agricultural prices are projected to see modest gains of 2 percent and 1 percent, respectively, in 2021. The main risk to the price forecasts is the duration of the pandemic, including the risk of an intensifying second wave in the Northern Hemisphere and the speed at which a vaccine is developed and distributed.
The COVID-19 pandemic is a shock to global commodity markets that presents a challenge to policy makers in commodity exporters: to the extent that it is short-lived, policy stimulus can buffer its impact; to the extent that it is lasting, policy makers need to allow their economies to adjust smoothly to a new normal. Identifying the duration of commodity price shocks is a challenge that frequently confronts policy makers in commodity exporters, as documented in a Special Focus section. The Focus finds that industrial commodity markets are mainly buffeted by transitory shocks, whereas agricultural commodity markets are chiefly subject to permanent shocks.
The COVID-19 pandemic has delivered a significant shock to commodity markets but its impact has varied in magnitude for different types of commodities (figure 1.A). This contrasts with the previous global recession in 2008-09, when almost all commodity prices saw large, and persistent, declines.
Energy prices rebounded by one-third in 2020Q3 following their steep fall in 2020Q2, but remain nearly one-third below their pre-pandemic levels. Crude oil prices drove the recovery, almost doubling to an average of $40/bbl in September from their low of $21/bbl in April. The recovery in prices was driven by a sharp reduction in production, particularly among OPEC+ (figure 1.B). Compared to the fall in oil prices during the global financial crisis, the most recent decline was a little steeper but also saw a faster recovery (figure 1.C). However, the recovery in prices stalled in September amid renewed outbreaks of COVID19. Natural gas prices also rose sharply in 2020Q3, while coal prices were broadly stable.
Non-energy prices rose by 10 percent in 2020Q3, with increases in almost all commodities. The metals and minerals price index rose 20 percent (q/q) and most metal prices are above their pre 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. The robust recovery in China has led to a surge in consumption of metals, while consumption in advanced economies has proved resilient. The rapid rebound in prices is a marked difference compared to the global financial crisis, when prices saw larger declines that lasted for many months (figure 1.D). Precious metal prices also rose sharply, boosted by the depreciation in the U.S. dollar and lower interest rates. Agricultural commodity prices rose by 6 percent in 2020Q3, but with divergence between broadly stable grain prices and rising prices of other agricultural commodities.
Outlook and Risks
Energy prices are expected to average one-third lower in 2020 than in 2019 (an upward revision from April) and are forecast to see a sizeable rebound in 2021 (table 1). Non-energy prices are projected to see a modest increase in 2020 as a small fall in metal prices is offset by an increase in agricultural prices, and see a further rise in 2021. The outlook remains exceptionally uncertain and depends on the duration and severity of the pandemic, including the risk of an intensifying second wave during the Northern Hemisphere winter and the speed at which a vaccine is developed and distributed.
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