Covid-19 vaccines raise hopes of a rapid recovery in oil demand next year, but markets appear to have thrown caution to the wind.
Brent crude hit $ 50 a barrel last week, its highest level since March, before the Covid-19 pandemic really started to drive a hole in people’s lives and economic lockdowns hammered home consumption. oil. It sounds like irrational exuberance given that there is still a long way to go before crude oil markets return to normal.
Vaccines are certainly good news, but there are some …
It will take months for a significant proportion of people to be vaccinated. Even with a mass vaccination program underway in the UK, the country’s health secretary Matt Hancock warned on Thursday that “for the next few months we will not have sufficient protection” to ease restrictions. We don’t even know yet if people who have been vaccinated can still spread the disease.
It is more likely that many countries will see more lockdown measures first. We have yet to spend the winter in the northern hemisphere, a time when the virus is expected to thrive. Large family and social gatherings during the holidays will fuel the contagion. And outbreaks of cases will inevitably be followed by further restrictions on travel and further blows to the economic recovery.
Recovering from the huge impact of the virus on economic activity will not happen overnight. Take the example of commercial flights, which are stuck at around 60% of last year’s levels after a stalled rebound in August. The hardest hit has been international travel, which accounts for almost all long-haul air traffic which is the biggest consumer of fuel. How quickly these flights return will depend on governments’ confidence in their immunization regimes. If the deployment is slow, or absorption is low, vital air corridors may remain closed.
Covid is not the only thing to watch. Rising tariffs on trade, the potentially chaotic end of UK membership in the European Union, and the possibility that a new US president will be hampered by a hostile Senate could slow the pace of economic recovery.
Even when the consumption of transportation and industrial fuels begins to increase, which it is expected to do next year, there is still a long way to go before this translates into a similar increase in demand for crude oil. The huge excess stocks of refined products must first be removed. At the end of September, they were up 9% year on year in developed OECD countries, according to the International Energy Agency.
Dissenters will rightly argue that China’s crude oil imports are set to increase 10% this year. But this is mainly due to the big purchases made when crude prices collapsed, with much of the extra supply going to storage tanks. The country’s refined exports in October surpassed last year’s level as processing outstripped domestic demand.
Even when demand from refineries begins to increase, there are excess inventories of crude that must also be taken. OECD crude inventories increased 11% at the end of September, compared to a year earlier, and 14% compared to 2018. In the United States, inventories of crude and gasoline are both at their highest for at least a decade for the year period.
On the supply side, the group of oil producers OPEC +will add 500,000 barrels per day to the oil supply next month. This is less than initially expected, but it could still beenough to tip an expected global drawdown in oil inventories in the first half of 2021 into another build.
The increase in crude prices that we have seen in recent weeks is alreadywhich reduces refining margins, making it less attractive for mills to remove crude from reservoirs and turn it into refined products. The only way to improve margins is to increase the prices of refined products – another headwind for growing demand – or to lower crude prices.
While the new vaccines are a light at the end of the tunnel, there is still a long way to go before they emerge from the darkness. The oil markets are getting ahead.
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
To contact the editor responsible for this story:
Melissa Pozsgay at [email protected]