The Fuse

Oil Stuck Between Vaccine Optimism and Short-Term Spike in Cases

by Nick Cunningham | November 12, 2020

Oil prices shot up by nearly 10 percent on November 9 after Pfizer announced that its vaccine was more than 90 percent effective against the coronavirus. The positive news brings the prospect of an end to the pandemic closer to a reality.

But in the meantime, the spread of the virus is accelerating, leading to a growing number of new lockdowns and restrictions. The oil market now finds itself stuck between an optimistic medium-term outlook and a dismal next few months.

Vaccine vs surging cases
After a few weeks in which WTI traded below $40 per barrel, bullish sentiment came roaring back in recent days. “News of a possible vaccine against Covids-19, a projected draw in US crude stocks and widespread expectation that OPEC+ may postpone a scheduled supply increase are fueling the price gains,” Rystad Energy’s Head of Oil Markets Bjornar Tonhaugen said in a statement on November 12. A growing number of oil ministers from OPEC+ nations are coming around to the idea of extending the current production cuts beyond January, something that is “music to traders’ ears,” Tonhaugen said.

The news of a successful vaccine really awoke global markets. “A vaccine has been what markets have been praying for since the beginning of this downturn,” Tonhaugen said. The potential for the definitive end of the pandemic, perhaps sometime mid- to late-2021 once the vaccine is widely distributed, would also put an end to travel restrictions. Needless to say, that is welcome news for oil traders.

However, despite the vaccine news, “[t]here is little in the way of fundamental factors to support any more pronounced upswing,” Commerzbank wrote in a note after the most recent rally.

The spread of the coronavirus not only continues, but it is accelerating. U.S. daily case counts have nearly doubled since the start of November, from around 75,000 per day to over 140,000 per day as of November 11. Germany, France, the UK and parts of Italy have announced new stay-at-home orders.

“What America has to understand is that we are about to enter Covid hell.”

Hospitalization is rising in the U.S. and there is a little sign that this third wave will slow down anytime soon. “What America has to understand is that we are about to enter Covid hell,” Dr. Michael Osterholm, director of the Center of Infectious Disease Research and Policy at the University of Minnesota, said in an interview with CNBC. “The next three to four months are going to be, by far, the darkest of the pandemic.”

The impact on oil demand, while much narrower than the initial wave in March and April, will be significant. Notably, U.S. mobility data shows that travel has already begun to decline, despite very few new restrictions or lockdowns. The spread of the virus itself induces a decline in mobility, and thus, a decline in energy consumption.

Goldman Sachs says demand could suffer a hit of around 3.1 million barrels per day (Mbd), bringing “the oil market rebalancing to a halt.” Extra supplies from Libya do not help either. “After a 2.2 Mbd October deficit, we now expect a 1.0 Mbd December surplus,” Goldman analysts wrote in a November 9 note.

The International Energy Agency also downgraded its demand forecast in its latest Oil Market Report. The agency cuts its third quarter oil demand forecast by 0.3 Mbd, and it cut its fourth quarter demand forecast by 1.2 Mbd.

2021 demand rebound still possible
OPEC+ is set to meet in the next few weeks, and easing off of the current production cuts, as they had hoped to do, now looks unlikely. The IEA cut its first quarter 2021 demand estimate by 690,000 barrels per day. “With a Covid-19 vaccine unlikely to ride to the rescue of the global oil market for some time, the combination of weaker demand and rising oil supply provides a difficult backdrop to the meeting of OPEC+ countries due to take place on 1 December,” the IEA warned.

Still, the dire short-term public health outlook does not necessarily translate into another downward spiral for crude oil prices. The negative demand impact will be shallower than the second quarter plunge, while the resolve from OPEC+ ministers to avoid another slide in prices should stabilize the market.

Tighter balances and higher prices are still likely in 2021. The IEA said that while demand will be soft early next year, for the full-year demand should rise by 5.8 Mb/d, an upward revision of 0.3 Mb/d from last month’s forecast.

Other analysts see something similar unfolding. “In coming weeks, the market will remain caught between vaccine, lockdown and US election headlines, leaving for further price volatility and downside risks as the surplus weighs on crude timespreads,” Goldman Sachs analysts said. However, the Covid wave will “delay but not derail the oil market rebalancing,” Goldman analysts concluded.