The Rally In Oil Stocks May Be Short-Lived

First Pfizer and now Moderna have provided a much needed shot in the arm to the embattled oil industry, with their news about vaccine candidate efficacy lifting stocks strongly in the past week.

The Pfizer news kicked off the best week ever for energy stocks, CNBC reported, and Moderna’s update marked the start of what could be another strong week, especially as it came on the same day as OPEC+ decided to extend the current oil production cuts for three more months, till end-March. But how stable is the rally? This is the question investors should be asking.

It all hinges on the prospect of efficacious vaccines becoming widely available soon, and mass vaccination leading to a strong rebound in oil demand as people start traveling again. But the trial data is very early and based on small samples of trial participants. Pfizer, Moderna, and all other vaccine makers must collect more data, and not just on efficacy but on safety before they start distributing it on a mass scale.

There are also logistics challenges for the speedy distribution of large quantities of vaccines for the coronavirus. As the Wall Street Journal’s Max Colchester and Drew Hinshaw noted in a recent report, previous large-scale vaccination initiatives took years to be successful. They also tended to target specific demographics, such as children.

This time, there is a strong sense of urgency, and the aim is to vaccinate as many people as possible, regardless of age. This means getting enough doses to people and then encouraging them to take the vaccine. All of this takes time, and we’re not talking about a few weeks.

So, oil demand is not rebounding in any meaningful way anytime soon, at least not in Europe and the United States. It is rebounding in Asia, although more weakly than many hoped. And the surge in new Covid-19 cases in Europe and the U.S. could eventually offset the optimism sparked by the announcements from Pfizer and Moderna.

And then there’s the U.S. election and the renewable energy agenda to consider, especially for the long term.

“When you think about the fundamental change in how we get energy, clean energy, the emphasis that a [Joe] Biden administration is likely to put on that, I would view this [last week’s oil stocks rally] as a cyclical trade but not a secular trend that I would want to hold onto as a long-term investor,” said Nancy Tengler chief investment officer at Laffer Tengler Investments this week, speaking to CNBC.

Related: Oil Markets See Light At The End Of The Tunnel

Indeed there is a growing awareness of sustainability in energy among investors, and this awareness is pushing them to either reduce or completely eliminate their exposure to oil stocks despite the allure of stable dividends. These, by the way, just proved not so stable this year thanks to the crisis, with some supermajors cutting the payout because of the oil price rout.

Oil stocks have always been in a direct relationship with economic news. Positive news about the economy, national or global, tends to benefit the shares of oil companies as economic growth has so far invariably meant improving oil demand. This may be about to change in the future, however, because of the attention renewables are getting. It will be energy demand that will be growing as economies grow, but not necessarily oil demand.

These are trends that are slower to unfold than a market rally sparked by a vaccine update—following which, the CEO of Pfizer sold $5.6 million worth of stock in the company. Oil stocks are having some of their best days this year right now, and there will be more rallies down the road. The important thing about them is that they are unlikely to be particularly lasting, not until the industries reliant on oil begin to recover.

By Irina Slav for Oilprice.com

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