Oil markets may reach a turning point in January after nine months of plummeting demand amid the Covid-19 pandemic.
At least, that is what Opec and Russia forecast at their meeting on December 3. The group of oil-producing countries foresees a gradual reintroduction of two million barrels per day (bpd) of crude oil next year. At no more than 500,000 bpd per month, the pace of the pivot is expected to be glacial.
The question is whether Opec is on track or thinking wishfully, given the continuing uncertainty and logistical mountain of vaccinating hundreds of millions of people around the world.
Pessimists might say that January is too early to expect a significant uptick in demand for oil. Let’s take the case at hand – the early adopters of the first vaccines.
The Pfizer/BioNTech vaccine was approved in the UK and the rollout has already begun. Problems arose after recipients with a history of allergies and asthma reported serious negative reactions to the vaccine and authorities warned this group not to have the vaccine until more is known.
The first priority is to vaccinate vulnerable groups, such as those in nursing homes and their staff. The UK expects to vaccinate up to 20 million people in vulnerable groups by the end of 2021.
At the time of writing, the US began its first shipments of Covid-19 vaccine on Sunday following the final approval from the Centers for Disease Control and Prevention (CDC). The Pfizer-BioNTech vaccine has also arrived in Canada and several other countries continue to authorise the emergency use of the vaccine, including Bahrain and Kuwait.
However, social distancing measures, partial lockdowns, travel restrictions and other factors weighing on oil demand are still expected to prevail through at least the first quarter of next year. The global transportation fuel industry – worth $609 billion in 2020 – was heavily impacted by the economic slowdown this year and is expected to grow by just 2.3 per cent by 2027.
The upside is that the first steps have been taken on the long road to mass Covid-19 vaccinations worldwide, and this should be instrumental in boosting confidence. The restoration of confidence is a key factor to sustain oil prices after almost a year of uncertainty and unpredictable demand.
China’s continued economic recovery from the pandemic is another positive story as conditions improve. The country imported 11.08m bpd of crude in November, not far from the 11.18m bpd in the same month last year. Aramco signalled its increased confidence by hiking January deliveries to Asia by 80 cents.
The same cannot be said for the US, where petrol sales slumped to a five-year low in November and Covid-related job losses in the US oilfield and services sector rose to 91,680. However, the US began to vaccinate people on Monday..
The upside presents more to look forward to for Gulf states. Their economic recoveries were intensely pressured by the drop in global oil prices and the resulting reduction in government revenues.
In related developments, the US Energy Information Administration estimates that vaccine breakthroughs are expected to boost demand for oil by the middle of next year, meaning that the medium-term outlook is improving. In accordance with its expectations, the EIA hiked its price forecasts for WTI and Brent to $41.43 per barrel and $48.53 per barrel, respectively.
On balance, there are more short-term headwinds to face in oil markets, but the outlook is brighter, especially for the middle of 2021. January contracts may be too soon for Opec’s expected increase in production to be taken up, although contracts later in the year may see more appetite due to better sentiment.
The global economic recovery is likely to be incremental and follow the progress made by international vaccination programmes. I expect short-term conditions to stay volatile in the sense that any negative developments in vaccines could disproportionately affect sentiment. However, once reports of large-scale immunity to Covid-19 come through, there could be a massive leap forward in the global economy.
Hussein Sayed is the chief market strategist at FXTM.