After a dismal year, the oil market needs a savior. And while a vaccine may play that role eventually, investors just got a tough reminder of how far there is to go.
What’s happening: Oil prices have skyrocketed this week on news that a coronavirus vaccine could be approved before the end of the year. But the rally looks premature, my CNN Business colleague Hanna Ziady reports.
On Thursday, the International Energy Agency slashed its forecasts for demand in the second half of this year and the first quarter of next year, noting that the resurgence of the coronavirus in Europe and the United States will weigh on fuel consumption.
“Vaccines are unlikely to significantly boost demand until well into next year,” the Paris-based group said.
Early results indicating the Covid-19 vaccine developed by Pfizer and BioNTech is more than 90% effective pushed Brent crude futures, the global benchmark, above $45 a barrel earlier this week — their highest level in more than two months. Traders bet that a vaccine would encourage a return to travel, boosting demand for fuel.
But the IEA forecast is a reminder that the oil market will face continued pressure until a vaccine is widely distributed. On Wednesday, the United States logged more than 140,000 new Covid-19 cases, a record high, while New York’s governor limited gatherings to 10 people.
“The problem is, acceleration in demand will not happen just because of positive news from vaccine trial results,” Bjornar Tonhaugen, Rystad Energy’s head of oil markets, said in a recent note to clients.
Producers agree: On Wednesday, OPEC said that weaker-than-expected demand in the US transport sector and lockdowns in Europe will be a drag on demand for crude this year and next.
“The oil demand recovery will be severely hampered and sluggishness in transportation and industrial fuel demand is now assumed to last until mid-2021,” the group of oil producers said in its monthly report.
The price outlook: Prices may keep edging higher thanks to indications that OPEC members could extend existing production cuts by around three to six months, helping to ease oversupply challenges. But the situation in Europe and the United States is a major overhang.
“As is the case for all commodities, oil is a spot asset that must first clear current supply and demand imbalances before long-dated prices can rise,” JPMorgan strategists told clients last week. “As lockdowns in Europe accelerate and localized outbreaks in the US broaden, oil balances will likely be further tested in the next couple of months.”
These two regions account for one third of global oil demand, according to JPMorgan.
Big picture: The complicated environment surrounding oil prices highlights the difficult calculus for investors right now. In light of positive vaccine news, those taking a longer-term view may start to feel comfortable snapping up risky assets again. But short-term, plenty of stress remains.