2021 Outlook: From Pandemic to Pandemonium?

Sometimes the stars align, and everything just goes right—then there is 2020. After a year in which very little went right, perhaps it’s encouraging that Jupiter and Saturn are moving into alignment next week. Apparently, the conjunction between the two planets on Monday—which is also the Winter Solstice—will be the closest in almost 800 years. But that’s not a key plank in our above-consensus call for the global and Canadian economy in 2021. We believe that there are many, more compelling, signposts that activity is coiling for a powerful rebound in the coming year after an incredibly challenging spell.

The global economy is expected to rebound 5.5% in 2021, and then advance another 4.0% in 2022, after plunging 4.0% this year. To put those figures into some perspective, the prior worst recorded year in the post-war era had been a drop of ‘just’ 0.1% in 2009, while a typical year for the world economy in recent times would see growth something just a bit above 3%. A keen observer would note that even with our call of a strong rebound in the coming two years that the level of activity would still be well below its underlying trend by the end of 2022. Part of that shortfall reflects the simple fact that some of this year’s loss on spending in the service sector—such as on travel, entertainment, restaurants—may never be recouped.

The other part of the shortfall, though, may also suggest that even our relatively upbeat view on the next two years is actually understating the potential for growth to snap back. Insofar as vaccines are rolled out effectively, and there is a strong take-up, there is a case to be made that we are underestimating growth in the second half of next year and into 2022. Incredibly supportive fiscal and monetary policies, robust financial conditions (i.e., lofty asset prices), heavy-duty pent-up demand, and the build-up of excess household savings in many economies point to the possibility of a serious burst in spending later next year.

China serves as a clear example of how forcefully things can bounce back as conditions return to something approaching normality. Both retail sales and industrial production have carved out nearly a perfect V-shaped recovery in the world’s second largest economy. Famously, it will thus be one of the few nations to post any growth this year; some of the other lucky few will include Taiwan, Vietnam and Ireland. We look for China to build on this year’s constrained 2% rise with a robust 8% surge in 2021, before easing back to a more trend-like 5% in the following year. The three-year average growth rate of about 5% will pale only somewhat compared with the pre-virus trend of just over 6%. The sturdy rebound is a major reason why non-oil commodity prices—particularly base metals—have seen such a remarkably fast recovery even amid the deepest global downturn in decades.

One implication of the relatively robust recovery in commodity prices, as well as the deep dive in interest rates and strong financial markets, is that emerging markets held up relatively well overall. Despite a vicious drop in global GDP and the wild financial market turmoil in the spring, most emerging market economies avoided the worst. While there were some very specific cases of financial strains—Turkey—most were able to slash borrowing rates, capital flows resumed after a brief stall, and currencies began to recover as the U.S. dollar faded through the second half of the year. This is not to minimize the severe challenges many emerging economies face, especially those heavily reliant on tourism. But, the resiliency of the developing world and a crisis averted on this front is a case of the dog that didn’t bark.

In the advanced economies, sectors that were able to re-open did see a rapid V-shaped recovery in Q3 from the spring shutdowns, and that provides comfort for the call for strong gains in 2021. However, large portions of the economy have still been left behind, and the furious second wave has seen broadening and deepening restrictions across much of the OECD more recently. Amid the patchwork of varying measures, it’s incredibly difficult to assess the economic damage from the second-wave containment steps. It appears that financial markets are all but ignoring the mounting bad news and focusing on the post-vaccine world. But that doesn’t get around the fact that we are about to face a wave of tough economic statistics in coming weeks, most likely including an outright drop in European GDP in Q4, and a near-miss in other economies.

The Euro Area and the U.K. are going to report some of the biggest economic declines in the world for 2020, owing to both their especially challenging experience with the virus but also due to a heavy reliance on the service sector (notably tourism). The flip-side is that these economies may also be poised for the biggest snapbacks. After a near-7% drop in the Euro Area, we look for a 5.5% rebound in the coming year, and then a 3% advance in 2022. The U.K. was hit even harder with a massive 11% setback this year, with Brexit uncertainty weighing on top of everything else. With just days to go, the prospects for a trade deal with the EU are fading, but a partial recovery is still likely in 2021 even in a no-deal world. (On a technical note, the dive in U.K. GDP appears to be exaggerated by an unusually large reported drop in government spending, which may also set the stage for an unusually big rebound in 2021.)

Elsewhere, Japan saw a somewhat lighter hit than other major developed economies with a drop of just over 5% this year—everything is relative—even though it entered the year already in recession after last year’s sales tax hike. Given that nation’s weak underlying growth and a milder setback in 2020, we expect a more modest 3.5% recovery next year, even with the delayed Tokyo Olympics. Australia also was relatively less hard-hit, despite the massive wildfires at the start of the year, a one-sided trade fight with China, and a strong lockdown in Victoria. While the RBA is trying to hold it back, the Australian dollar is now up more than 10% from a year ago and not far from parity with the loonie at around 76 cents(US).

When the final numbers are in for 2020, one truly unusual development (among the many) is that the U.S. economy is likely to print one of the smallest declines in the advanced world. We have chopped this wood before, but the short story is that the U.S. benefited from some of the strongest policy medicine in the world as well as its outsized tech sector. However, we also have to point out that restrictions were relatively light in the U.S. compared to others—even now, with some of the highest virus caseloads in the world on a per capita basis—and thus the direct economic hit was lighter. As the year draws to a close, markets are almost fully anticipating that a new round of fiscal support of $900 billion (or a hefty 4% of GDP) is nigh, including direct payments of $600 per individual. If enacted in a timely fashion, this could add to our upgraded call of 4.5% GDP growth for next year; we have also bumped up our 2022 call by half a point to 3.5%. Yes, one could say that the vaccine has moved the needle on growth, pardon the awful pun.

We have also tweaked our call on Canadian growth over the next two years. However, unlike the U.S., this revision is not one-sided to the high side. Full disclosure, we have been relentlessly on the high side of consensus for more than six months now, and remain there even with these revisions. Still, the deepening restriction measures in Canada, with the clear prospect of more in coming weeks—including new school closures in some provinces—have prompted us to trim our Q1 call to close to zero. Even with a stronger second-half rebound, courtesy of the vaccine (first injection just this week in Canada as well), this will clip the full-year estimate for GDP growth by half a point to 5.0%. But, at the same time, we are also lifting the view on 2022 on the upbeat vaccine developments by half a point to a sturdy 4.5%, leaving activity at the same spot as we had expected before by the end of that year. While we have trimmed our 2021 call, note that the risks appear evenly balanced; that is, there is still some serious upside risk to this forecast, and the recent strength in commodity prices, and financial markets in general, are certainly pointing in that direction.

Beyond the growth outlook, of course there are many, many other economic issues and concerns swirling in this tumultuous environment, which are mostly covered in the following Thoughts. But one pressing question we have fielded almost since the first days of the pandemic response is whether there is a risk that inflation could return amid the tidal wave of stimulus. These concerns may well grow louder in the coming year, especially if growth comes close to the upside possibilities. And the Fed has essentially told us that they will tolerate a bout of above-target inflation. As if on cue, Canada printed a high-side surprise for CPI of 1.0% y/y in November, and the spurt in oil to $49 points to further headline pressure. But also note that Japan, China and the Euro Area are all still posting outright declines in headline prices, while core inflation is effectively stuck in neutral in North America. Ultimately, while the tail risks for inflation have fattened, we believe that even in a world of a potentially rapid recovery, overwhelming slack in many sectors, and an overhang of unemployment for years, any burst in headline inflation will simply not be sustained.

U.S. Economy: Cheers to a Healthier Year

Following the worst year since 1946, the U.S. economy can only do better in 2021: the question is how much better? With the pandemic raging and Congress wrangling, the new year is likely to come in like a lamb, but it should go out like a lion as mass inoculations pave a return to near-normalcy.

With a second wave of the coronavirus now topping the first in daily caseloads and fatalities, more states are curbing business activity; mostly indoor dining, bars, gyms and some close-contact services. While the constraints are a pale imitation of the spring shutdowns—when factories and schools were shuttered—they could still cause the recovery to grind to a halt for a few months. Moreover, should Congress not extend support programs for the unemployed, assistance to small businesses, moratoriums on tenant evictions, and forbearance on student loans, the economy could well begin the new year like the last one, in a hole that it needs to climb out of. The loss of extended UI benefits for more than 12 million Americans could slice annual personal income growth by roughly 4 ppts in Q1. Although a fiscal deal appears within reach, it may come too late to prevent more pain for millions of struggling households.

Once we get past the first quarter, however, the COVID clouds will begin to part. The vaccine rollout will gradually put an end to the restrictions on activity, while slowly unleashing a year’s worth of pent-up demand for travel, indoor dining, and entertainment. The willingness to spend will be matched only by the ability to shop, as a mountain of excess savings (estimated at 6% of annual GDP) has accrued during the pandemic. At the same time, rising equity and home values are padding household wealth, another source of spending. Low interest rates will support mortgage refinancings and household borrowing, driving a 5%-plus rebound in consumer spending in 2021. While home sales are likely to slip from recent 14-year highs, the housing market should remain strong. Home prices should keep rising and residential construction will stay firm amid the tightest resale markets on record and a potential upturn in immigration under a Biden presidency.

Powered by the need to expand digital platforms for customers and workers, business spending has rebounded sharply, and will receive an extra lift in 2021 from rising commercial structures beyond the already-ample need for industrial and warehouse space. Multi-family housing in major cities will get relief from easing pandemic anxiety, allaying recent downward pressure on rents, notably in San Francisco and New York. But don’t expect office construction to return to pre-virus levels, as a partial shift toward remote work will reduce long-term demand. Some office buildings will need to be repurposed along multi-channel lines for working, living, and shopping including online fulfilment. Slower to return will be bricks-and-mortar retail, as millions of converts have taken the online route during the pandemic—e-commerce generated 14.3% of U.S. retail sales in the third quarter, up 3 ppts from late last year.

The economy is expected to grow 4.5% in 2021, the best year since the 1999 tech boom. The jobless rate should fall from 6.7% currently to 5.3% by year-end, though it could take until 2023 to fully recover the initial 22 million plunge in payrolls. The range of uncertainty around our forecast remains wide. Major downside risks include possible glitches in the vaccine rollout, an adverse mutation of the virus, and the absence of fiscal support early in the year. One threat we probably won’t need to worry about is a spike in inflation (and interest rates), given the dynamic duo of lofty unemployment and advanced automation. More likely is a correction in asset prices if they run too far ahead of fundamentals. Unlike in 2020, however, there’s also substantial upside for the economy. A smoother rollout of vaccines could lead to early herd immunity. As well, consumers could simply “let loose” after spending a year in COVID prison. A Democrat sweep of the two Senate runoff seats on January 5 would also usher in more fiscal stimulus and a wave of new spending on infrastructure, education, housing, child care and the environment, with some offset from higher corporate income taxes and tighter regulations. The only certainty about the coming year is that it won’t be boring—though we could stand for much less excitement than the past year.

Fed Policy and U.S. Rates Outlook

We look for the Federal Reserve to remain steadfast as 2021 unfolds, maintaining a policy bias to increase accommodation further if necessary, particularly during the first third of the year as surging COVID-19 cases and consequent increases in business and social restrictions weigh on economic growth.

On December 16, the FOMC repeated that it would maintain the 0%-to-0.25% fed funds target range “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time”. But, it committed more concretely to “continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals”, compared to the prior looser commitment to purchasing “over coming months… at least at the current pace”.

This more accommodative policy step was not as big as it could have been (e.g., increasing the pace and/or weighted-average-maturity of purchases), likely reflecting the FOMC’s upgraded medium-term economic outlook (thank you, vaccines) and anticipation of more accommodative fiscal policy.

At the time of writing, a fiscal relief bill has yet to be finalized. Our working assumption is that we will get one in time to avert several support measures from expiring at year-end, including expanded and extended unemployment insurance benefits (covering 14.0 million as of November 28), the moratorium on evictions, along with mortgage and student loan forbearance. It should also include a reopened and higher-funded Paycheck Protection Program, assistance for state and local governments’ rollouts of vaccines, and additional household income support in the form of UI top-ups or tax rebates or both, with a total price tag under $1 trillion.

In the Summary of Economic Projections, the ‘dot plot’ showed only 5 of 17 participants pencilling in a rate hike by the end of 2023, just one more than in September despite the upgraded medium-term economic outlook. For 2021-22, real GDP growth is 0.2 ppts higher with the jobless rate 0.4-to-0.5 ppts lower, and the CBO-defined output gap closes by 2022-end instead of after 2023. However, the top of the central tendency range of inflation projections only gets above 2.0% (to 2.1%) in 2023, far from the criterion to “moderately exceed 2 percent for some time”.

Our other working assumption is that the Fed won’t tighten until early 2024, with the net risk weighing on the side of sooner action. With policy rates remaining at their effective lower bound at least until 2023, the front-end of the yield curve should remain restrained apart from what separate demand and supply pressures might materialize in the bond market, pressures that matter more for the back-end of the curve. Big budget deficits are projected to persist, keeping Treasury supply pressure on the boil. Meanwhile, investor risk appetites should be whetted as the rollout of vaccines brightens economic prospects and the attraction of riskier asset classes. Not helping this pending imbalance, beyond the next 12 months, we expect the Fed to start tapering purchases and to have stopped growing its balance sheet within the next 24 months.

However, any prospective increases in longer-term bond yields should be well-checked by policy rates remaining ‘low for long’, and inflation pressures remaining well-contained by economic slack (at least for a couple of years) along with the secular forces of disinflation from technological change (a trend accelerated by the pandemic) and an aging population. For example, we look for 10-year Treasury yields to average around 1.25% by the end of 2021.

Finally, after averaging record highs in April 2020, at the peak of pandemic panic, the trade-weighted U.S. dollar index has slipped about 9.0% reflecting several factors including improving investor-perceived global economic prospects and ebbing risks; U.S. policymakers being relatively aggressive on both the QE and budget deficit fronts; and, the pandemic hitting the U.S. relatively hard. The former factor, particularly, looks to weigh on the greenback further as the distribution of vaccines unfolds globally, weakening the unit another near-3% by the end of 2021.

Canada Rates Preview: Headed Higher

This past year will be remembered as challenging for one and all. The pandemic drove the Bank of Canada into unprecedented territory, with unconventional measures unleashed for the first time, in addition to bringing the policy rate to the effective lower bound. The coming year is expected to be far more subdued on the monetary policy front, with fiscal policy continuing to surge forward.

The Bank of Canada’s task for 2021 will be to ensure that financial conditions don’t tighten prematurely. Our base case is for policy rates to hold steady at 25 bps throughout the year. Rate hikes are off the table, though further easing is possible but would take a deterioration in the outlook (think vaccine issues or something like that). Potential easing measures are more QE, yield curve control, a funding-for-lending scheme and a micro rate cut.

On the QE front, the BoC is going to have to thread the needle with messaging. They already managed to taper once while keeping markets calm. They’ll have to manage that feat again in 2021. We anticipate a modest further tapering, driven entirely by a falling issuance profile for the federal government. The BoC doesn’t want to have too large a footprint, so a pullback once the issuance numbers are finalized is a logical step. In an effort to dampen the market impact, the Bank could again push its purchases further out the curve to minimize the reduction in overall stimulus. This is likely a Q2 story, since the budget usually isn’t released until late March or early April.

Beyond rates and QE, the Bank will also have to manage its forward guidance. January will already be a challenge with the vaccine timeline far more optimistic than they assumed in the October MPR. However, the increasing breadth of COVID restrictions put in place in recent weeks suggests there’s some notable downside to Q1. Even if Q4 is a bit better than the BoC projected, a weak Q1 could be enough to keep the timing of the output gap closing in 2023. Indeed, as noted above, the Bank does not want to prematurely tighten financial conditions, so they’ll likely try to stick with the 2023 forward guidance as timing for rates liftoff for as long as possible.

Finally, the BoC will renew its inflation targeting agreement with the Government of Canada in the coming year. While changes are possible, a mildly modified version of the status quo seems like the most likely outcome at the moment. A small potential tweak might be a greater focus on the 1%-to-3% target band rather than the 2% mid-point. That would provide a bit more policy flexibility, though their current flexible inflation target regime arguably already provides similar room to navigate. Note that Deputy Governor Beaudry’s recent speech hinted in that direction; “But rest assured we will not overuse QE and overshoot our 1 to 3 percent target range for inflation. The exit strategy for our QE program is tied to our inflation goals.”

Looking at the Canada curve, our call for policy rates to stay at the lower bound as the economy continues to recover points to ongoing steepening pressure. While longer-term rates look to rise, we still only have 10-year Canadas at 1.10% at the end of 2021. As we approach the latter stages of the year, steepening pressure could subside a bit as rate hikes potentially start coming into view.

For the loonie, it was a wild 2020 getting absolutely hammered at the height of the crisis, before fully recovering, and then some, to end the year at the strongest in over two years. We’re looking for 2021 to be a bit more subdued with modest strength through the course of the year. An ongoing recovery in the global economy is expected to lift commodity prices, supporting the loonie’s advance. The bigger story on the FX front is the anticipated US$ weakness, which will be tough for any currency to offset.

Canadian Regional Economic and Fiscal Outlook

All Canadian provinces have been hit by the pandemic, forcing some degree of economic disruption and digging fiscal holes of various depth. That said, Alberta, Manitoba and Quebec are clearly facing more stringent containment measures as 2020 winds down, which will weigh on 2021 calendar growth figures. All of these provinces are expected to lag the 5.0% national average, even as they presumably start to see better sequential growth prints toward the end of 2021Q1. With most regions of Ontario also facing some degree of containment, the province will also struggle to outperform; although it is arguably among the best-positioned for a strong recovery later in the year. Atlantic Canada was relatively insulated in 2020, and should see more subdued growth numbers in 2021 as a result, while British Columbia continues to look like an outperformer. Aside from COVID, the regional landscape will also be shaped by subdued energy-sector activity (although late-2020 price action is supportive of industry cash flow), a limited return of travel and tourism, and a continued lull in population flows that had been very supportive (especially in smaller provinces) in recent years.

Housing will remain in focus, as usual, but more so because of the roaring finish to 2020. Sales activity is expected to cool nationally, but prices should remain supported by improving confidence, still-tight supply and record-low interest rates. We expect the MLS HPI to rise 7% in 2021 with the first half of the year still characterized by outsized strength in single-detached homes, especially in smaller markets, partly offset by sluggish condo prices. Whether or not that rotation persists after the vaccine is widely administered is probably a question for the 2022 outlook, but we suspect core urban markets will ultimately find a solid footing again after further underperformance in the meantime. At the same time, more supply and outflows of nonpermanent residents could apply some pressure to urban rents in 2021.

The 2021 provincial fiscal outlook is still highly uncertain given that this year’s starting point for deficit levels is likely subject to meaningful revision. That said, the provinces that have issued FY21/22 guidance are pointing to deficit reductions somewhere in the order of one-third of FY20/21 levels, on average. That amount of consolidation would suggest the combined provincial deficit narrows to around $60 billion from about $93 billion this fiscal year. To be sure, the provinces will remain historically active borrowers and—depending on how much pre-financing takes place before FY20/21 closes—total requirements could top $140 billion, versus this year’s $171 billion pace. While the provincial deficit should be a still-chunky 2.5% of GDP, keep in mind that the federal government will continue to carry the vast majority of the fiscal load, with Ottawa’s deficit likely around $150 billion, or more than 6% of GDP. The big focus will be on how $70-to-$100 billion of yet-to-be-used stimulus spending gets allocated, and if any fiscal anchor re-emerges.

A Year of Global Healing

This is one year that everyone will look forward to with far more anticipation than ever before. The hope is that, in 2021, we can put the pandemic behind us and maybe, just maybe, remove the mask and indulge in a gathering with friends and family. That time will happen at some point and it won’t come soon enough. Look for solid economic rebounds after being crushed in 2020.

Europe was among the first hammered by the coronavirus and it spent most of 2020 protecting the economy. The ECB created a massive bond buying program to keep interest rates low and special facilities that allowed banks to borrow from the central bank at favourable terms on the condition that credit would keep flowing. And EU leaders managed, eventually, to agree on a €1.07 trln long-term budget and a €750 bln EU Recovery Fund, or the Next Generation EU, made up of grants and loans to those countries whose economies took the biggest hit from the lockdowns. That agreement did not come easily but at least there was a rare display of solidarity when it was badly needed. The funds will help Italy, France and Spain, for example, pick up the pieces of their economies and move forward. And as the virus is eventually brought under control, governments will roll out programs to help their fragile economies heal. But there will be a time when the crisis is over that the fiscal hawks will demand evidence from those who received Recovery Fund grants that spending is being reined in. That will be a late 2021/early 2022 story. Next year will also see a rebuilding of relationships between the U.S. and the EU, and perhaps a fresh start on trade issues such as the global digital tax and the long-running Airbus/Boeing dispute. On the political front, Germany’s federal elections will be key. A new head of the ruling CDU will be elected and that person will eventually replace Angela Merkel as Chancellor. Recall she declared in December 2018 that she would not run again at the next federal election after her party’s poor showings during that year’s state elections. It would be interesting to see how Merkel would fare today after her strong leadership during the pandemic, with the latest lockdowns notwithstanding. In any event, a new leader will be named by year-end.

The United Kingdom will begin 2021 with a fresh start on trade and will freely negotiate trade agreements on its own. As soon as January begins, the EU’s Common External Tariff will be replaced with the U.K. Global Tariff, which will apply to imported goods from countries without an existing trade agreement. Currently, the U.K. only has agreements in place with Japan and Switzerland; interim ones with Canada, Mexico and the U.S.; and, a fisheries deal with Norway. Talks are underway with Australia. And, negotiations with the U.S. will restart on a more positive note now that the British government removed the illegal clauses embedded within the Internal Market Bill. However, PM Johnson’s promise that Britain will be more prosperous outside of the EU will likely not be realized in 2021 if a trade arrangement is not made with its biggest trading partner. The economy will likely feel the impact of supply disruptions (borders no longer freely open) and higher prices (tariffs now in place), which will hurt confidence and spending.

Faster, higher, stronger. Yes, Japan is going to give the Summer Olympics another go, with the Games scheduled to run from July 23 to August 8. PM Suga is “determined” to host the Games, and all efforts will be made to have spectators at the events. If the Games are successful, they would bolster his chances of winning a full-term as LDP leader during the party’s September 2021 election.

China was likely the only major economy to grow in 2020, as its early-year hit from the coronavirus gave it more time to recover. That, and the fact that its economy is still focused on goods production and less so on services, benefited GDP during this tumultuous year. Still, the estimated 2% increase would be the slowest in nearly half a century; now, we look for an 8% advance in 2021, even with a stronger yuan. On the foreign relations front, how President Xi gets along with President-elect Biden will be closely watched. Trade relations between China and the U.S., as well as the EU, should be less volatile, but even with the new occupant of the Oval Office, they will take time to warm up. Look for China to focus on trade elsewhere, particularly in the Regional Comprehensive Economic Partnership, the massive trade agreement between a dozen countries that was signed in November.

Crude Oil Outlook: Tough Road Still Ahead

West Texas Intermediate crude is heading into the new year with plenty of wind behind its back. Thus, it would not be surprising to see WTI cross the $50/bbl threshold, at least temporarily, in the weeks ahead; especially if the rollout of vaccines accelerates and/or the pace of new COVID-19 caseloads markedly decelerates. Looking back, the current price of crude would have appeared almost inconceivable after prices plummeted into negative territory in April.

However, it is not all clear skies ahead for black gold as its supply and demand dynamics remain challenging. This explains why OPEC+, rather wisely, chose to scale down its production target cut by 0.5 mb/d to 7.2 mb/d in January and limit future cuts to no more than 0.5 mb/d per month. OPEC+’s new strategy should help prevent a large market imbalance (i.e., excess crude oil inventories) from building even if demand falters. Indeed, the near-term recovery in global oil demand, which is still roughly 7 mb/d below its pre-pandemic level, has already proven to be bumpy given that a number of countries are in the midst of a second wave of COVID-19 cases and economic lockdowns.

There is also a growing risk that non-OPEC+ supply could begin to escalate. This has been highlighted by the sudden surge in Libyan crude output to around 1.25 mb/d from zero in recent months. A wave of Iranian production could re-enter the market if President-elect Biden were to ease or eliminate sanctions. But the bigger wildcard actually lies closer to home, south of the 49th parallel. As WTI approaches $50, it raises the possibility that recently shut-in shale oil production could be restarted.

As the recovery in both supply and demand is likely to ebb and flow, much will depend on OPEC+’s commitment to balance the oil market. The arduous negotiation over revising the production target in early December revealed deeper divisions within OPEC+ than previously thought and suggests the risk of the cartel breaking down cannot be completely discounted. Furthermore, the spectre of monthly meetings to negotiate production targets could exacerbate the volatility of crude oil prices next year, compared to relative stability in recent months.

Key Takeaway: The prospect for WTI to head much higher will be difficult, especially following this past year’s rather remarkable rebound. That said, we have nudged our forecast for WTI to average $47 in 2021 (previously $45) and have penciled in $50 for 2022.