Monday is vaccine day. It is obviously an exaggeration but for the second consecutive week extremely good news arrives from pharmaceutical companies. After last week’s announcement yesterday Moderna reported the results of the preliminary analysis of its vaccine. It showed an even greater effectiveness than the Pfizer/BioNTech inoculation. Moderna claimed that its Covid-19 vaccine was almost 95% effective. The makers of both vaccines are now pursuing emergency authorization from the US FDA provided further studies confirm that they are safe. Once approved the hard task of distribution can start. BioNTech believes that its first vaccines can be administered in January whilst Moderna expects 20 million doses available in the US shortly after approval and 1 billion doses available globally through next year. The world is one more step closer to being able to contain the coronavirus. Just like a week ago the market reacted to the news with understandable optimism and stock indices jumped higher. Both the DJIA and the S&P 500 settled at their highest levels ever. It is, however, imperative to emphasize that infection rates are currently on a free run therefore the road to economic recovery will not be a straight line.
Oil received an extra adrenalin shot in the arm. The OPEC+ Joint Technical Committee focused on compliance yesterday and noted that the groups October adherence was 96% when taking into account promised compensation for past overproduction. The Joint Ministerial Monitoring Committee that recommends concrete step to the group meets today. OPEC+ sources claim that most participants are leaning towards a 3-month extension of the current ceiling. On a net basis it would take an extra 500-800,000 bpd of oil off the market – OPEC+ would put the planned 2 mbpd increase in output on hold whilst Libya could produce between 1.2-1.5 mbpd 1Q 2021. In the light of rising production in the North African country it would definitely be a step in the right direction, but the eternal pessimist would argue that if oil prices running ahead on vaccine hopes compliance would inevitably suffer, perhaps even more than it did in October.
Forecasts are in contrast with perceptions
Last week’s announcement about the Covid vaccine was greeted by unconditional enthusiasm for two days. Both equities and oil rallied hard whilst gold and the dollar, traditional shelters, were briefly deserted. Front-month Brent jumped to a two-month high by Wednesday morning before it retreated. On the other hand, equities relentlessly kept marching uphill. It appears that the potential roll-out of the vaccine, even though the exact timing is currently unclear, is a good enough reason for investors to remain cheerful on stocks and prevent oil to drift meaningfully lower despite last week’s downward revisions in global oil demand do not confirm this optimism.
Equities: Major stock indices settled at their highest level yesterday. It shows a general belief in a successful fight against the pandemic and a perception of protracted economic recovery. In fact, the optimism is so unbroken that the ratio between the S&P 500 index and Brent is around 83 (one unit of the 500 US companies represented in the index would buy you nearly 83 barrels of Brent crude oil). Although it is well below the aberration of 140 seen back in April it is nearly twice as much as the 2019 average. It also implies that it is the supply side that holds oil prices back from strengthening significantly.
Safe havens: Gold dived from over $1,950/ounce to $1,862/ounce after the vaccine announcement last Monday. Although it has stabilized since it is still well below the $2,000/ounce peak seen in August. The dollar has also lost popularity since last Monday as its index against six major currencies is struggling to regain the ground lost last week. Dismal demand for safe havens also implies investors’ optimism.
Crude oil spreads: The resilience in Brent and WTI spreads are encouraging. Albeit outright price peaked last Wednesday the structure of the two main crude oil markers have remained firm. The front-month Brent spread that stood at -39 cents/bbl before the vaccine news is now -17 cents/bbl. The improvement in the December/January spread in WTI has not been as spectacular as in Brent, nevertheless the contango is narrowing here, too. The discount of the December contract has shrunk from 35 cents/bbl on November 6 to 23 cents/bbl yesterday. Longer-dated spreads have also improved. The M1/M6 Brent spreads has jumped from -$1.84/bbl on November 6 to -99 cents/bbl yesterday. The same spread in the US benchmark strengthened from -$1.96/bbl to -$1.20/bbl during the same period. The contango on the front four Brent CFD weeks has also narrowed from -45 cents/bbl to -35 cents/bbl. Stronger structure makes it less economic to store oil and once backwardation re-emerges stock depletion is likely to accelerate.
Crack spreads: The product/crude oil price differential is the only indicator suggesting that significant price recovery in oil is not imminent. The Heating Oil/WTI crack is at the same level as on November 6 whilst the RBOB/WTI and RBOB/Brent cracks are a touch lower. Consequently the 3-2-1 CME crack spread has also lost some value over the last one and the half weeks. Once they start improving fresh refinery buying will help the crude oil structure strengthen further supporting outright prices.
Commitments of traders: The latest reports cover the week ending November 10 when outright prices were on their ascent after the Pfizer/BioNTech news hit the screens. It is, therefore, will not come as surprise that money managers have greatly increased their net speculative length (NSL). Combined WTI and Brent NSL jumped by 59 million barrels on the week. An extra $3.8 billion dollar was invested in the two main crude oil futures contracts. The amount under management has increased from $13.2 billion to $17 billion week-on-week.
What is interesting is the composition of the NSL. In Brent the 36 million bbls rise was achieved by bulls adding 9 million bbls to their length and bears cutting their exposure by 27 million bbls. In other words, the former group of market players has not committed itself to the upside, but shorts have taken protective action. In WTI the numbers are even more telling. The 23 million bbls increase in NSL was exclusively achieved by shorts cutting exposure by 26 million bbls whilst gross long positions have fallen by 3 million bbls. A meaningful increase in gross long positions will be another sign that money managers will start feeling comfortable with betting on a protracted price recovery.