Crude oil prices rose to the highest since early spring after the FDA yesterday gave the green light to the Pfizer-BioNTech Covid-19 vaccine, with government officials saying several hundred vaccination sites across the country would be supplied with vaccines by tomorrow. But traders—who have been buying oil and fuels futures with renewed eagerness over the past few weeks—are now preparing for a market correction. Traders from hedge funds slowed down their purchases of crude oil and derivatives contracts, Reuters’ John Kemp said in his weekly column, noting that this is the fifth week in a row when traders have been buying with a voracious appetite.
This appetite will be difficult to sustain, though, even after vaccinations start in the United States, for two main reasons: how long it will take to vaccinate the population and oil’s fundamentals.
The regulatory approval of the Pfizer-BioNTech vaccine for the United States was a major step in a bullish direction for oil, but it was the first of many. Challenges remain concerning both availability and logistics. CNN reported yesterday that while the first medical workers were vaccinated on Monday, it would take months for most Americans to be vaccinated.
The federal government bought 100 million doses of the Pfizer vaccine earlier this year, which means 50 million people will be vaccinated since it’s a two-dose vaccine. Pfizer has now said it would be unable to supply additional quantities until the middle of next year.
In short, it will be a while before things begin to return to normal.
Europe is also in an uncertain position with vaccinations. Governments are wary of making the Covid-19 vaccination obligatory, but there is growing public mistrust in the Covid-19 vaccines that may compromise efforts to achieve herd immunity through inoculation.
Then there is the question of oil supply and demand that could take the wheels off this latest price rally. OPEC is preparing to start pumping half a million barrels daily more from January. The U.S. is already pumping more, and so is Libya, the latter of which produced 1.25 million bpd earlier this month. Related: Goldman Turns Bullish On Oil: Sees $65 Brent In 2021
At the same time, OPEC yesterday lowered its oil demand forecast for this year. The cartel now expects demand to have fallen by 9.7 million bpd since the start of the year, averaging 89.99 million bpd. The demand projection for 2021 was also revised down. OPEC now expects 2021 oil demand to average 95.89 million bpd, which would be a solid improvement on 2020 but still 410,000 bpd lower than earlier projections.
Then there’s Iran, which last week said it expected to be exporting 2.3 million bpd of oil next year, confident it could reach a deal with the Biden administration regarding sanctions that are currently stifling its oil exports. A deal is not exactly certain: while Biden has signaled he is ready to negotiate, Iran has in its turn signaled it would not be the first one to make concessions. Also, the U.S. energy industry is not looking forward to another price slump and might exert some pressure on the president-elect.
At the same time, the Asian recovery from the pandemic is certainly bullish for oil, as is Europe’s exit from the second round of lockdowns. According to a recent Bloomberg report, fuel inventories have been draining steadily, with India, China, and Japan reporting a rebound in gasoline demand. For many analysts, the rebound is only a matter of time, and this time appears to be next year, putting upward pressure on prices despite the challenges.
“Oil is the cheapest of all reflation assets,” according to Energy Aspects’ Amrita Sen, who spoke to Bloomberg. “With vaccines slowly rolling out, we expect investors to start returning to the oil sector and for prices to continue firming.”
“Price momentum has slowed appreciably during the past couple of weeks and while some fresh or unexpected bullish headlines may be required to advance the complex into new high territory, we will also note a market that appears to have developed immunity to bearish headlines that would normally be slapping the complex down,” another analyst, Jim Ritterbusch of Ritterbusch Associates, told Reuters.
The clouds over oil, in other words, are beginning to clear. It might take a while for them to clear completely, but demand is on the mend, and ultimately, this is the single most important factor right now.
By Irina Slav for Oilprice.com
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Many bullish factors are accelerating this upward trend. The first is that both the fundamentals of the global oil market and the global economy have been invigorated by the start of vaccination in parts of the world and the promise of a return of the global economy to its full economic activity. The proof is the rise of Brent crude price by 26% since the vaccine announcement almost a month ago.
The second factor is the projection by the IMF that the global economy is projected to grow in 2021 by 5.4% compared with 3.3% in 2019 led by emerging markets particularly China and India. Moreover, the Asian oil market, the world’s largest, is strengthening.
The third factor is that underinvestment in oil and gas will exert upward pressure on oil prices. At the height of the pandemic, oil and gas investments estimated at $131 bn that were slated to be approved in 2020 were shelved, some indefinitely. This could push oil prices to between $80 and $100 by 2024.
A fourth factor is the extension of OPEC+ production cuts until the end of the first quarter of 2021 and the call by the Energy Minister of Algeria, which holds OPEC’s rotating presidency for 2020 to calibrate the easing of production cuts to the global oil demand. This means that raising OPEC+ production by 500,000 barrels a day (b/d) in January isn’t a foregone conclusion.
A fifth bullish factor is that with outstanding debts approaching $1 trillion and a breakeven price of between $60 and $65 a barrel for most drillers, US shale oil could hardly expect to stage a comeback soon.
The global economy could also get a further impetus with a probable end to the trade war between the US and China under a President-elect Biden’s administration and a possible de-escalation of tension between Iran and the United States. But Iran shouldn’t bank on an early lifting or even easing of the sanctions.
Even if in an unexpected scenario sanctions were lifted or eased, Iran could only add additional 500,000 b/d to the market. Iran’s crude oil exports averaged 1.9 million barrels a day (mbd) during 2016-2018 according to the authoritative 2019 OPEC Annual Statistical Bulletin. Iran’s crude exports have never managed to exceed 2.125 mbd. By evading US sanctions, Iran has managed to raise its exports to 1.5 mbd. That is why the maximum it could add to the global oil market supplies id 500,000 b/d.
Based on the above, Brent crude price could hit $60 in the first quarter of 2021 and $70-$80 in the third quarter. This trajectory will give an average price of $65-$70 in 2021 and testing $100 by 2024.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London