A great amount of uncertainty was removed from the market during the turbulent week that is behind us. Firstly, the US has a new president (at least it is more plausible than not), secondly it looks increasingly possible that the coronavirus can be contained and thirdly an amicable EU-UK divorce agreement got a boost on Friday when Boris Johnson’s most influential advisor, a hard core Brexiter has been fired. The transition to the new US administration will be anything but smooth, however, investors liked what they saw and not even a politically divided country dented their enthusiasm. Stocks strengthened as the results of the elections were announced supporting oil, too.
The icing on the cake came on Monday when Pfizer and BioNTech announced a week ago that a coronavirus vaccine, pending regulatory approval, will be made available this year, and could be rolled out on a large scale in 2021. (1.3 billion is the predicted number.) The news triggered a massive flight into risk assets. Equity indices hit new all-time highs and oil rose to levels not seen for two months. As it became clearer towards the second half of last week that the vaccine will be made available gradually the enthusiasm started to evaporate. Nevertheless, the welcome development in the fight against Covid-19 is a potential game-changer and the most significant step towards winning the health war for two reasons. Firstly, it is proven to work with a 90% efficiency, a remarkable success rate. Secondly, more announcement of successful vaccine trials can be expected in the near future as pharmaceutical companies produced a rather spectacular U-turn in attitude from March this year when, based on past experiences of responding to virus outbreaks, they seemed reluctant to pursue potentially unprofitable inoculations.
Hopefully, the light ahead is the end of the tunnel and not a high-speed train coming from the opposite direction. This end, however, is still relatively far and the road there will be bumpy. Infection rates are currently rising almost all over the world. Consequently, mobility restrictions are being re-introduced. Latest data from the John Hopkins University shows that new cases are now steadily over 600,000 globally. With this in mind, the latest monthly supply-demand were published last week.
Under the current conditions it is nothing short of a nightmare to forecast future supply and demand but the three main agencies reached a firm consensus on one aspect of 2021: that is that consumption will be lower than previously anticipated, as things stand now. The EIA cut next year’s demand estimate by 290,00 bpd for the full year, the IEA by 120,000 bpd and OPEC by 580,000 bpd from the October figure. The latter two provides written commentaries to their numbers and in all fairness neither of them dismisses the potential success of an effective vaccine. The IEA bluntly states that “for now, our forecasts do not anticipate a significant impact in the first half of 2021”. OPEC thinks that the impact of an “effective and widely distributable vaccine” could be felt as early as the first half of next year. In other words, both reports have, justifiably, left the door open for upward demand revisions next month assuming tangible development in approving and distributing the vaccine.
Any obstacle will have a negative effect on prices as the latest set of data paints a gloomy picture on OECD stock movements for next year. Simply put, the situation has deteriorated unambiguously since August because a.) mobility restrictions are leading to demand cuts and b.) increasing Libyan supply puts an additional bearish spin on the oil balance. Note the following: the EIA, which publishes OPEC production projections now predicts OECD stocks to be at 2.927 billion bbls by the end of 2021. Three months ago, this figure was 2.757 billion bbls. For OPEC and the IEA we use our own OPEC output estimates where we assume a gradual increase in Libyan production to 1.4 mbpd by the end of 2021 (it might be too conservative as it has reportedly already reached 1.2 mbpd) and we do not anticipate extra easing in OPEC+ production ceiling. Under this scenario OECD oil inventories will reach 2.693 billion bbls by the end of next year, up from 2.476 billion bbls in August (IEA). The OPEC figure implies an upward revision of 475 million bbls since August to 2.857 billion bbls. Accommodating Libyan barrels at the next OPEC+ meeting in two weeks’ time is an absolute must (together with the issue of Iraqi non-compliance). Tomorrow’s JMMC meeting could shed some light on the OPEC+ attitude regarding extra production. However, even that might prove to be insufficient to maintain market optimism if the launching Covid-19 vaccine fails, something that is not anticipated at this stage.
Risk assets had a good week, primarily due to the Monday’s and Tuesday’s euphoria of Pfizer/BioNTech. The two main crude oil futures contracts gained more than 8% and global stock indices also registered a jump of well above 2%. The Dow Jones Industrial Average performed exceptionally well as it rallied 4.1% last week. Friday’s performance was a good reflection of what to expect from different asset classes in coming months. Equities kept relentlessly marching higher. The MSCI Global Equity Index and the S&P 500 indexes both closed at their highest level ever helped by the potential vaccine roll-out and by the announcement of President-elect Joe Biden’s Covid team that no nationwide lockdown is contemplated when the new administration is in place. Oil, on the other hand, gave up some of the gains made in the first half of last week. Significant demand improvements next year are one thing, but the clear and present danger posed by rising Libyan oil production needs to be dealt with soon otherwise the long-awaited price recovery will suffer yet another setback.