Oil prices surged after Pfizer (PFE) and BioNTech (BNTX) announced promising results for a COVID-19 vaccine trial, offering fresh hope that fuel demand will rebound with normalized travel. However, a demand recovery for the hard-hit commodity could be stalled until mid-2021 as higher prices spur increased output and a critical mass of vaccines remains distant.
The onset of COVID-19 in the spring crushed global oil prices, at one point sending the North American benchmark (CL=F) into negative territory for the first time in history. For months, the price of West Texas Intermediate crude has mainly hovered between US$35 and US$40 per barrel. Prices crested above $US65 earlier this year, prior to the global onset of the pandemic.
The December contract climbed 1.84 per cent to US$42.12 at 11:42 a.m. ET on Wednesday.
Months of efforts to contain the virus, such as limited air travel and work-from-home measures, have weighed on oil far more than other material asset classes, according to Caroline Bain, chief commodities economist at London-based Capital Economics. A return to normal, she said, means oil will rebound in a similarly dramatic fashion.
“We have always thought that the oil price would benefit the most from a vaccine,” she wrote in a research note on Wednesday. “After all, it has suffered disproportionately from the virus containment measures. However, any upward pressure on prices may be tempered by a rebound in oil supply.”
OPEC cut its global demand forecast by 300,000 barrels per day in its closely-watched Monthly Oil Market Report on Wednesday. The cartel cited new lockdowns in major European economies including the UK, France, Italy and Germany, as well as demand weakness in North America.
OPEC and its Russian partners, known as OPEC+, will meet on Nov. 30 and Dec. 1 to discuss ongoing production cuts. The group had agreed to a record 9.7 million barrels per day starting on May 1. That was pared back to 7.7 million in August. James O’Rourke, Bain’s colleague at Capital Economics, said increased demand could impact OPEC’s stated plans for further tapering next year.
“In the face of weak demand, most analysts had expected OPEC+ to roll over its current level of cuts until end-Q1 2021, at least. But if demand looks likely to bounce back more rapidly, OPEC+ may decide to stick to its original schedule of cuts, which could undermine the recovery in prices,” he wrote on Wednesday.
“Demand could still be slow to recover to pre-virus levels even with a vaccine. After all, it is going to be some time before the vaccine reaches a critical mass, which will mean that oil demand will probably only begin to recover in earnest in the middle of 2021.”
Adding to concerns about rising supply, O’Rourke said output from Libya has surged in recent months, from 200,000 barrels per day in September to reportedly more than one million in early November.
“All told, a vaccine is positive for oil prices, at least from the perspective of a faster revival in demand,” he wrote. “But the return of oil supply in Libya and uncertainty about future OPEC+ supply mean that it won’t be plain sailing for prices just yet.”
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.