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Any US stimulus deal before holidays can push crude prices to $50 a barrel

Demand for oil is unlikely to rebound in a meaningful way anytime soon, at least not in Europe and the United States. A lot will hinge on the effectiveness and distribution of the vaccine for coronavirus.

November 24, 2020 / 09:17 AM IST

Oil ended the previous week with some gains, just like most risky assets despite new lockdowns in several countries across the world and an increase Libya's production, which has reached 1.2 million barrels per day (Mbpd).

The main reason for the risk-on sentiment was the announcement by Pfizer that reported potentially promising early results from its Phase 3 vaccine trial. Moderna followed suit, announcing strong efficacy results from its late-stage vaccine trial.

However, it all hinges on vaccines becoming widely available soon and mass vaccination leading to a strong rebound in oil demand as people start travelling again. But, trial data is preliminary and based on small samples of participants.

There are logistics challenges as well for the speedy distribution of large quantities of vaccines. Previous large-scale vaccination initiatives took years to be successful. They also tended to target specific demographics, such as children. This time, there is a strong sense of urgency and the aim is to vaccinate as many people as possible, regardless of age. This means getting enough doses to people and then encouraging them to take the vaccine. All of this will take time and markets are not talking about a few weeks.

Along with the enthusiasm for the coronavirus vaccine, OPEC+ news was a major support for oil prices with the grouping agreeing that it may be best to extend the current level of production cuts of 7.7 million barrels until at least the end of March 2021, though a longer extension, until end of June, was also discussed. While the JTC can give recommendations, it cannot make any policy decisions. For that, we will need to wait for the official OPEC+ meeting at the end of November.

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Still, uncertainty remains as smaller Russian oil companies are planning to pump more crude this year despite output deal as they have little leeway in managing the production of start-up fields.

While oil demand in Europe and the US continues to disappoint, refiners in Asia are racing to procure crude from around the world, giving the oil market some hope that at least in one region demand is strengthening in the fourth quarter.

Demand in Asia is also supported by India, which is seeing a recovery in fuel demand that rose YoY in October for the first time since February. The race continues as China has emerged as the only country in the world still thirsty for oil.

For crude prices, the vaccine news kicked off the best week ever for energy, especially as it came on the day OPEC+ decided to extend the production cuts for three more months. But how stable is the rally? This is the question that can lead to profit booking at higher levels.

Demand is unlikely to rebound in a meaningful way, at least not in Europe and the United States. However, any stimulus deal done before the holidays will help keep crude prices stay near the upper boundaries of its recent trading range and can push them to $50 a barrel.

(Navneet Damani, VP – Commodities Research, Motilal Oswal Financial Services.)

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Navneet Damani is the VP-Commodity Research at Motilal Oswal Commodity Pvt Ltd.
first published: Nov 24, 2020 09:17 am

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