After a string of bad news, the oil market needed a shot in the arm. It got it last Monday, when pharmaceutical company Pfizer announced its new vaccine against coronavirus had shown 90 percent effectiveness in initial trials. Oil prices gained $3 per barrel on hopes of ends to lock-downs and a resumption of flights. The vaccine is good news, but for now the market needs to come down off its high.
Oil has been among the worst-hit sectors from the pandemic, and the prospect of an end to the outbreak consequently has favoured it. While the S&P stock index gained just 1 per cent, US petroleum firms were up from 11-20 per cent on the day of the announcement.
The news from Pfizer and its partner BioNTech has been almost the only recent ray of light for the oil market. A surge in virus cases in the US and Europe has led to the threat of renewed restrictions. The prospect of the US presidency and senate being held by opposing parties risks gridlock on a badly-needed economic stimulus.
Opec’s latest monthly report suggests lower demand for its crude next year than previously expected, because of a weaker world economy. The exporters’ organisation sees a drop of oil demand this year by 9.8 million barrels per day, and a rise of 6.2 million bpd next year, 0.3 million bpd less than it expected last month. That means global oil sales are 3.6 million bpd lower next year than they were last.
And this market will be more contested: output from Libya, an Opec member not bound by the group’s current quotas, has swiftly rebounded to 1.215 million bpd from almost nothing after a blockade of its ports was lifted. Iraq has returned to over-producing to ease its desperate financial situation. Iran too, under strict US sanctions, could see some recovery next year if new American president Joe Biden returns to engagement with Tehran.
Under these strains, the next scheduled Opec meeting, on November 30, will consider whether to go ahead with the previous plan to reduce cuts by 2 million bpd as of this coming January. More likely, it will decide to maintain the current cuts through the first quarter, and maybe the second quarter too.
This would be sensible. I have advocated that Opec should move to regain its lost market share as fast as possible – but not faster. This winter in Europe and the US will likely be grim – Covid-19 cases, hospitalisations and deaths are all soaring. Never mind a second or third wave: for many countries, now is the wave.
The Pfizer vaccine is very promising, and the company hopes to have it authorised for emergency use in the US before the end of this year, but questions remain over the data from the initial trials.
The mRNA approach, different from traditional vaccines made from deactivated, weakened or dead infectious agents, would be the first ever of its type. It remains to be proved whether the vaccine also prevents asymptomatic infections, though BioNTech’s chief executive is confident it will.
Perhaps more daunting are the logistics. The mRNA does have the advantage of being quicker to manufacture. Pfizer hopes to produce 1.3 billion doses by the end of next year. Of those, almost one billion have been snapped up by the EU, UK and USA. Other states may have to wait more than a year. And anti-vaccine pseudoscience and conspiracy theories may also deter take-up.
In September, more than half of adults in the US said they would definitely or probably take a vaccine to prevent Covid-19 if it were available, down from 72 per cent in May, according to a survey by the Washington-based Pew Research Centre. In June, 71.5 per cent of participants in 19 countries said they would probably take a Covid-19 vaccine, according to a survey published last month. About 90 per cent on respondents in China said they would take it and 55 per cent in Russia.
The Pfizer vaccine is given in two doses, 21 days apart, and has to be stored at -70 degrees Celsius, which complicates distribution and may be a challenge for many developing nations. Immunity might not be long-lasting, with top-up shots perhaps required annually.
Other vaccines are also in trial, including one from China’s Sinopharm and Russia’s Sputnik 5, both being tested in the UAE, and another mRNA type from Moderna. The vaccine under development by Oxford University and AstraZeneca requires just a single dose, is a tenth of the price of Pfizer’s and only must be kept cool, above freezing. These alternatives could be crucial if problems emerge with Pfizer’s product or if it struggles to produce enough.
So, it could be well into next year before enough people have been vaccinated in major countries for the pandemic to recede. Then economic activity will revive as people go out to work, shop and dine. Those people lucky enough to have kept their jobs may have substantial savings and be ready to spend. Flying abroad for holidays will be a welcome relief.
But some habits, such as conducting most international business by teleconference instead of in-person, and working from home more than commuting, will remain. Heavy debt burdens will weigh on many people and countries, and some governments will turn to austerity, as they did after the 2008-9 financial crisis, leading to years of slow growth.
Perhaps surprisingly, when the Pfizer news broke, the contango in oil prices narrowed, prompt prices rising more than prices for future delivery. Yet as discussed, the vaccine will probably only help revive demand later in next year. This may partly reflect a growing conviction that Opec will keep the lid on output for now.
We should be hopeful that one or more vaccines are a brilliant success, but wary of all the possible pitfalls. This makes it prudent for Opec to avoid over-supply early next year, but to be ready to react quickly as and when demand revives. The oil market has had a bad bout – it should not rush its convalescence.
Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis