Oil prices face an uphill battle with the prospect of two possible supporting factors in the near term: a weaker US dollar and the promise of an effective vaccine against Covid-19.
The Pfizer/BioNTech announcement on November 9 about a 90 per cent effective vaccine has already helped to improve sentiment. While far from bullish, the positive news was a spark of optimism that there’s light at the end of the tunnel.
However, the possibility of a globally delivered vaccine is still three to six months away.
Pfizer expects US Federal Drug Administration emergency approval soon after the third week of November, when it expects to reach a safety requirement in the final stage of testing. The company anticipates 50 million vaccine doses in 2020 and up to 1.3 billion doses in 2021.
If all goes well with the vaccine, the positive impact on oil demand via the travel, transport and industrial sectors may become significant in the second quarter of 2021. Looking at the current situation, however, Brent crude spot price action remains subdued at around $40.
The US Energy Information Administration trimmed its price expectations for 2020 to an average of $40.61 per barrel. In 2021, Brent is expected to average $46.59 per barrel, according to the November short-term energy outlook.
The US dollar’s relative value to other currencies also impacts demand for oil. A weaker greenback made an appearance during the uncertainty around developments in the US elections. If this becomes a short-term trend, more favourable exchange rates against the dollar may trigger some buying interest. Bargain hunters may see this as an opportunity to lock in deals at lower prices, especially in light of an improved Covid-19 vaccine outlook for the first half of 2021.
For the time being, a weaker dollar and a Covid-19 vaccine are the most influential factors for oil prices, but there are other drivers to watch for as well.
The Organisation of Petroleum Exporting Countries cut its oil demand outlook by 0.3 million barrels per day (bpd), projecting it to lose 9.8m bpd in 2020 compared with 2019. The world’s two biggest oil market players are Opec+ allies and US shale.
The US shale industry hangs in the balance amid political change in America, meaning that the price counterweight to Opec could change direction. Under President Donald Trump, US shale flooded onto the world’s oil markets as his administration pushed for dominance. An abundance of supplies from the US kept global oil prices in checkmate.
Will we see a big change under President-elect Joe Biden? Big oil may face more obstacles and environmental protection restrictions, particularly for the state-run offshore leases, according to energy analysts Wood Mackenzie. These expected limits on offshore energy exploitation could mean that the industry is 30 per cent lower by 2035 compared with the Trump administration outlook.
The same report points out that a Biden administration would support green energy and transportation, meaning that there could be four million electric cars on US roads by 2030. Relatively speaking, this is a minor amount given the 274 million cars on US roads, so there is a long way to travel before electric cars have a significant impact on demand for oil.
There is an element of uncertainty about the Biden administration’s approach to US oil, but it appears that rolling back the major changes made by Mr Trump would be a massive undertaking and could take time.
In air travel, a new development may impact demand for oil in the long term. Airlines, which account for around 6 per cent of global demand for oil, are now developing hydrogen into jet fuel to reduce carbon dioxide emissions.
Oil-producing companies have seen the writing on the wall and some of the majors have diversified into cleaner energy such as natural gas, wind, hydrogen or solar power. BP, Shell, ENI, Chevron, Total and Exxon all made strategic investments by snapping up sustainable energy companies.
While demand for crude may start recovering by the second quarter of 2021 if a vaccine is delivered worldwide, I expect that the second wave of Covid-19 may continue taking a toll on oil during the winter months.
Hussein Sayed is the chief market strategist at FXTM.