Strategists at Capital Economics think that energy commodities will claw back a bit of the ground that they have lost relative to industrial metals over the next two years or so, as some cyclical factors linked to COVID-19 which have weighed more heavily on the former unwind. However, certain structural headwinds mean that energy commodities should underperform considerably in the longer-term.

Key quotes

“Since mid-2014 the underperformance of energy commodities has been remarkable. We think this reflects two separate shocks which have been dire for oil but have left industrial metals relatively unscathed. First, there have been dramatic changes on the supply side of oil markets. Second, the coronavirus crisis has hit demand for oil much harder than demand for industrial metals. We expect this second set of cyclical factors to unwind over the next two years or so.”

“Notwithstanding the dip in oil prices in recent weeks due to the resurgence of coronavirus in advanced economies, our forecasts assume the virus is eventually brought under control globally. Accordingly, we project that the price of Brent crude will gradually recover from ~$40 per barrel at present to $60 by end-2022.” “We think that the boost to metals prices from China’s strong economic recovery has now mostly run its course, and expect prices to fall back a bit by 2022, as the boost from earlier stimulus fades.”

“Beyond the next two years or so, we expect structural factors to mean that energy commodities resume their underperformance relative to industrial metals. The structural slowdown in oil demand, which is already underway due to the ongoing transition towards green energy, could deepen if greater working from home and less international travel for business purposes become permanent legacies of COVID-19.”

“We do not expect a stellar performance from industrial metals over the next decade or so, and suspect that the returns from them will fall short of those from equities, given the structural slowdown we anticipate in China. But unlike energy commodities, metals such as copper and aluminium stand to benefit from efforts to combat climate change due to their extensive use in green technologies.”

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