Crude oil prices rose to its highest level since early spring after FDA gave green light to Pfizer-BioNTech Covid-19 vaccine yesterday, with government officials saying tomorrow hundreds of vaccination centers across the country would be supplied with vaccines. But traders – who have been buying oil with renewed eagerness and driving futures in recent weeks – are now preparing for a market correction. Hedge fund traders slowed down their crude oil and derivatives contracts, says Reuters’ John Kemp said in his weekly column, noting that this is the fifth week in a row that traders with a voracious appetite have bought.
However, this appetite will be difficult to sustain even after vaccinations start in the United States for two main reasons: how long it takes to vaccinate the population and the basics of oil.
Regulatory approval of the Pfizer-BioNTech vaccine for the United States was an important step in an optimistic direction for oil, but it was the first of many. Challenges remain both in terms of availability and logistics. CNN reported yesterday that while the first medical workers were vaccinated on Monday, it would be months before most Americans were vaccinated.
The federal government bought 100 million doses of the Pfizer vaccine earlier this year, meaning that 50 million people will be vaccinated because it is a two-dose vaccine. Pfizer has it now said it would not be able to deliver additional quantities until mid next year.
Basically, it will be a while before things start to return to normal.
Europe is also in an uncertain position with regard to vaccinations. Governments are wary of making the Covid-19 vaccine mandatory, but public mistrust in the Covid-19 vaccines is on the rise, which could jeopardize efforts to achieve herd immunity through inoculation.
Then there’s the question of the supply and demand of oil that could hit the wheels of this latest price hike. OPEC is preparing to pump half a million more barrels a day from January. The US is already pumping more, and so is Libya, which produced the latter 1.25 million bpd earlier this month. Related: Goldman Goes Bullish on Oil: Sees $ 65 Brent in 2021
At the same time OPEC yesterday reduced his forecast of oil demand for this year. The cartel now expects demand to have fallen 9.7 million bpd since the beginning of the year, to an average of 89.99 million bpd. The demand forecast for 2021 was also revised downwards. OPEC now expects oil demand to average 95.89 million bpd by 2021, which would be a solid improvement over 2020, but still 410,000 bpd lower than previous forecasts.
Then there’s Iran, which said it last week expected export 2.3 million bpd of oil next year, confident that it could reach an agreement with the Biden government on sanctions currently suppressing its oil exports. A deal is not exactly certain: while Biden has indicated its willingness to negotiate, Iran in turn has indicated that it would not be the first to make concessions. Also, the US energy sector is not looking forward to another price drop and could put some pressure on the president-elect.
At the same time, the Asian pandemic recovery is certainly optimistic for oil, as is Europe’s exit from the second round of lockdowns. According to a recent Bloomberg report, fuel stocks have been steadily declining, with India, China and Japan reporting a recovery in gasoline demand. For many analysts, the recovery is only a matter of time, and this time appears to be next year, which is putting upward pressure on prices despite the challenges.
“Oil is the cheapest of all reflation assets,” said Energy Aspects’ Amrita Sen, speaking to Bloomberg. “With vaccines slowly entering the market, we expect investors to return to the oil sector and prices to continue to rise.”
“Price momentum has slowed significantly in recent weeks and while it may take some new or unexpected bullish headlines to take the complex to new highs, we will also notice a market that appears to have developed immunity to bearish headlines that normally tearing down the complex, ”another analyst, Jim Ritterbusch of Ritterbusch Associates, told Reuters.
In other words, the clouds over oil are starting to disappear. It may take a while for them to disappear completely, but demand is recovering and ultimately this is the most important factor right now.
By Irina Slav for Oilprice.com
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