Oil Prices Rise On Vaccine Fantasy But Fundamental Reality Less Stable
Ellen Wald | Nov 12, 2020 10:54
Monday’s news that Pfizer's (NYSE:PFE) coronavirus vaccine may be 90% effective boosted stocks across much of the market. Travel-related businesses saw the most gains, and oil companies also saw their share prices rise.
ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX), for example, saw their stocks gain as much as $4.70 and $12.14, respectively. In the commodities markets, both WTI and Brent have made relatively substantial gains since the announcement, nearly recovering losses suffered since the summer driving season ended.
These moves seem to be largely fueled by vaccine headlines, speculation and trading amplification.
In reality, the supply and demand picture for oil in the fourth quarter of 2020 and first quarter of 2021 is not a positive one. Below we'll take a closer look:
h2 Demand/h2The month-long lockdowns recently implemented in Europe, are taking a significant bite out of demand, as this column discussed last week. Now, states and significant metropolitan areas in the United States appear to be following suit. New York have all issued overnight stay-at-home orders, curfews and/or restrictions on private gathering in personal residences this week.
There will likely be significantly less travel for the upcoming Thanksgiving holiday, after records in car travel were set last year. This does not bode well for the Christmas holiday season, either in the United States or Europe, as lockdowns, curfews and travel restrictions will make it nearly impossible to travel even for those who are willing.
Major forecasting institutions have slashed their expectations for demand, again. Almost halfway through the quarter, OPEC in particular made a serious downgrade to its 2020 Q4 demand projection—a 960,000 bpd reduction. This could be read as the organization’s attempt to push member nations towards a production cut promoted by Saudi Arabia, but it’s not the only forecasting group to come out with downward revisions on their demand outlooks this week.
The U.S. EIA cut its Libyan production is on track to hit 1.3 million bpd within a month and the country's national oil company says that Libya won’t comply with any OPEC quotas until it stabilizes its production at 1.7 million bpd.
There is some bullish news from the United States, as data from stocks continue to see significant draws. According to the EIA, U.S. production is at 10.5 million bpd. That is much lower than the 13 million bpd record set in early 2020, but the output numbers are better than some expected at the height of the coronavirus hysteria in the spring and summer.
Get The App
oil rig count is now back to May levels. At 226, rig count is still significantly lower than the 683 oil rigs active in March, but the decline seems to have reversed itself. Rig numbers have been steadily climbing throughout most of October and November.
It’s possible that U.S. production could experience another drop because new drilling is not keeping up with depletion rates, but the dynamic is very complicated. Each company differs in its profile of assets, cash flow, drilling costs, DUC inventory, and price point needed to increase production. Traders will need to see more data before making that call.
h2 Conclusion/h2The reaction of oil prices this week has reflected a fantasy based on the promise of a vaccine rather than actual fundamentals relevant to the contracts being traded.
However, sometimes the market sentiment is as important as supply and demand. The continuing drama surrounding the U.S. presidential election has had little impact on this week’s movement, and a market that is acting based on the reported promises of a complicated pharmaceutical may be a market that lacks predictability or stability.
What if the vaccine production or distribution faces problems or proves to be less effective than believed? On the other hand, what if the vaccine is a miracle drug?
So much depends on future news reports that are not contingent on oil fundamentals.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.