Oil to trade in a narrow range as demand unlikely to pick-up significantly anytime soon

Some breather for crude oil as vaccine hopes soften blows; as infection cases rise, the demand recovery looks like a long road ahead

oil industry and its impact

The situation of oil is currently one of a seesaw, which tilts towards the side that puts more weight. Despite the gloom around the fresh wave of infections surfacing in Europe, US and other parts of the world, when the news around Coronavirus vaccine just lifted the mood, question over the trial results of British company AstraZeneca has turned out to be a spoilsport.

Astra Zeneca which is working on a Covid-19 vaccine along with University of Oxford has issued a statement on this. The controversy erupted following AstraZeneca’s claims that its COVID-19 shot was 70 per cent effective in trials and could be up to 90 per cent effective.

What is fuelling oil?

Besides, AstraZeneca, there are others in the fray. There is a race as to who would reach the finish line first. One such contender is Pfizer, in partnership with BioNTech and Moderna. Pfizer has claimed 95 per cent success in its test results of the final phase. In case of Moderna, claims of 94.5 per cent efficacy have been made while Russia’s Sputnik V vaccine is reportedly 92 per cent effective. Meanwhile, Sinovac Biotech’s experimental vaccine CoronaVac is said to triggers a quick immune response.

The hope around vaccine coupled with the go ahead given to US President Elect Joe Biden’s transition to the Presidency helped oil hit USD 47 a barrel, recently. This is highest since the beginning of the pandemic in March. Brent crude hit a session peak of USD 47.23 while the US West Texas Intermediate (WTI) crude touched USD 43.94. In March, the WTI price went crashing at negative USD 37.

Demand Vs Supply

Since the onslaught of the pandemic began, the demand for the crude oil has weakened. With the emergence of a second wave, the consumption situation which improved over a period, has taken a hit again.

As per the estimates by JP Morgan – a US-based multinational investment bank and financial services holding company – the global oil demand will likely reach the pre-pandemic levels by the middle of 2022. This is after an assumption that the vaccine or vaccines, after their commercial launches, will be able to break the link between infection and mobility.

While the demand is expected to pick up gradually from here, if things don’t aggravate, to reach the pre-pandemic levels will take at least six quarters, denting chances of crude oil’s significant recovery in the immediate to near term. Most analysts have said that the crude oil is expected to trade in a narrow range for medium to long term.

Organisation of the Petroleum Exporting Countries (OPEC) and allies including Russia is already considering delaying the planned increase in oil production that was slated for January 2021.

The US crude inventories have edged up in the week ending 20 November, ensuring the supply side to lead the demand situation. In case of fresh lockdowns, the gap may further widen leading to increase in inventories.

The production-supply gap if allowed to get widen has ramifications. While, the production cannot be reduced below a certain threshold, lack of consumption will not only impact revenues for countries and companies, there is also a cost of maintaining inventory. There is a danger of price crash, like what happened in March this year when the US WTI crude oil prices plunged to negative levels.

Moreover, there is also a potential risk to health in the form leaks, which cannot be ruled out if the inventory is allowed to pile up for longer periods.

The US energy firms have been forced to cut the number of oil and natural gas rigs operating for the first time in more than two-and-half months. Steps are being taken to put a tab on the supply side. According to energy services firm Baker Hughes Co, the oil and gas rig count fell by two to 310 this week, with oil rigs alone dropping by five to 231, after hitting their highest since May last week.

The production from Libya is only contributing to concerns about oversupply in the market. It has added more than 1.1 million bpd of output since early September according to media reports. Libya is an OPEC member and is exempted from oil cuts.

It is also reported that the Russian oil companies were planning to pump more crude this year despite the output deal as they have little flexibility in managing the production of start-up fields.

There are already reports on Organisation of the Petroleum Exporting Countries (OPEC) and allies including Russia meeting to delay the planned increase in output, next year. The group was due to raise output by 2 million barrels per day in January which is roughly around 2 per cent of global consumption. The planned increase was a bid to steadily easing the supply cuts implemented this year.

The OPEC+ is expected to maintain cuts to avoid any dramatic fall in the oil prices.

Economic Repercussions

Oil and gas sector has been one of the hardest hit and it may turn out that the problems are far from over. Many economies are running on oil business, and for them to sustain this hit has become arduous and painful. Any further hit could increase their woes.

Grey Areas

The developments around the vaccines are still far from being conclusive so the hopes and apprehensions are moving in tandem. We still don’t know how many doses of vaccine will be good enough to deal with the virus, the overall cost that it would incur, the side affects from the vaccines, if any.

There are also concerns among several health experts about a likelihood of procedures getting tweaked by regulators to expedite the delivery. These concerns are legitimate and cannot be brushed under the carpets.

The biggest challenge could be on the logistics side to ensure the last mile delivery of the vaccine, especially in the developing world. In a country like India, where 1.3 billion people live, it could be an exercise of humongous proportions and may even take several years to give a shot to every citizen.

And to top this, the biggest worry is the complacency that people may get into, compromising on the precautions they still need to take as the developments on vaccines emerging on a regular basis. There are umpteen examples of such leeway taken by people across geographies. That could be disastrous as the lockdowns have been in place only because of the rampant increase in the number of cases.

Even with the vaccine in place, preventing new infections will be difficult. Ensuring the last mile delivery and vaccination of the entire population will be a long and tedious process.

The situation for economy and oil is precarious. With or without vaccine, the outlook in the medium to long term remains bearish. Any price related move will be triggered by news and may keep the situation volatile.

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