Oil is on the rise after a third company developing a vaccine for Covid-19 announced positive efficacy results this week. They may well continue to rise for a while, but it would pay to be careful with betting on an endless rally. Yesterday, after AstraZeneca said its vaccine candidate had 90% efficacy in some cases, oil benchmarks jumped to the highest in three months as traders rushed to build their positions ahead of the rebound that should logically follow a successful vaccination campaign.
Fund managers also went on a buying spree, Reuters’s John Kemp said in his weekly column. The total purchases made in the most traded crude oil and product contracts over the last two weeks reached 539 million barrels, Kemp noted, which was the highest since the start of September.
The buying spree is not limited to oil, either, and analysts are taking note. The Bank of America last Friday said traders have swarmed into riskier assets after the two vaccine updates from Moderna and Pfizer, pouring $27 billion in to equity funds and shares in the industries that were worst affected by the pandemic, including energy, banking, and travel.
But the bank cautioned against too much optimism: “We say credit and equity prices (are) to peak in coming months on peak positioning, peak policy, peak profits as optimism tops ahead of vaccine distribution,” the analysts told BofA clients.
Related: Saudi Aramco’s Landmark IPO Is Costing The Kingdom Billions Indeed, the higher oil—and stock—prices rise on this vaccine-prompted bullishness, the more vulnerable they become to a correction. Reuters’ Kemp noted this in his column, and bank analysts have warned about it in notes to clients.
The problem seems to be that traders are buying the vaccine efficacy news, but efficacy—and safety—is only the beginning. Swift distribution is another major aspect of a vaccine’s success, and the scale of vaccinations is another. The process, which the head of the U.S. federal government’s vaccination program said could begin in early December, would take at least several months until vaccinations are mass enough to make a difference to the so-called new normal.
In other words, it will be at least several months before oil demand picks up in a way that would be meaningful for prices over a period longer than 24 hours. That is, of course, if there are no serious side effects from the approved vaccines that could wreak a whole new kind of havoc on oil—and other—markets.
Meanwhile, OPEC+ is contributing to the bullish sentiment by signaling it would extend its current rate of production cuts into 2021, although it remains to be decided how long the extension will be. The cartel is meeting next Monday and Tuesday to discuss the issue.
News from China is also supporting prices this week: Bloomberg reported the country has started drawing down its oil inventories as domestic demand picks up and imports decline because independent refiners have used up most of their import quotas. China’s inventories were a cause for concern among oil traders when they were running near capacity, so the news of a drawdown has been welcome.
Right now, the going is good for oil. Pharma companies are bound to continue providing updates, and these are more likely than not to be positive. The rally could last a week or two if OPEC+ decides on an extension of more than three months. But it will likely come to an end when traders get a reality check, which is bound to happen. Air travel will not return to pre-pandemic levels overnight. It won’t return to normal over a fortnight, either. It will take months.
The sooner market players accept this fact, the less likely a major oil price slump caused by spooked traders would be.
By Irina Slav for Oilprice.com
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