Oil prices rose today as a result of progress in vaccination campaigns in the US, which are helping the country’s plan to spend and revive the economy stand on strong feet.
It is US optimism that is helping the oil market, as developments in other parts of the world are not moving towards the same direction, with populous countries like India and Brazil seemingly getting deeper in trouble than ever before, failing to deliver on hopes for a quick economic recovery.
Overall, the structure of the Brent price is still in a slightly bullish backwardation, as the short-term hesitancy over Covid-19 spikes are offset by long-term hope of vaccine campaigns doing their job and economies returning to normal, some as early as summer.
Τhe margin between the price of oil today and the expected price in a few months’ time is narrowing, so it is becoming less clear for traders whether it’s a sure bet to draw down storage and sell oil today or wait to benefit later.
Trader hesitancy is also reflected in the still quite robust crude oil levels in floating storage, which have been fluctuating along with the volatility in prices seen in March, but are still about 30% higher than one year ago.
Some players may be waiting out this oil demand lull and hoping to cash in later when demand is verifiably back in full swing. But refineries, which have to plan throughput schedules in advance and are coming off a very rough year, should be eagerly anticipating the promised comeback.
Despite today’s uptick, the price signals are a messy mix. Strong growth is coming in the future, but the virus is still a very real threat in the here and now. Europe is still very much in the trenches – from France announcing a 3-week school closure to the UK keeping a ban on foreign travel in place for now.
As much as they would like, most governments cannot put a time stamp on when they will reach herd immunity, and even then, there may be incentives to remain cautious on border openings – whether the justification is to prevent further iterations of mutation waves, or perhaps to encourage another round of domestic tourism this summer.
Although vaccination campaign progress in the US is helping oil prices climb up today, globally vaccine optimism is getting a bit outdated at the very moment when campaigns are ramping up and the recovery of oil demand is coming within reach.
The US, arguably one of the most important oil demand centers globally, already has close to 21% of its population vaccinated, and the UK is nearing 11%. The upward momentum in other countries is promising, but large discrepancies remain globally.
We estimate oil demand in the first half of 2021 to stand at 93.2 million bpd, but then forecast a takeoff towards 97.6 million bpd in the second half.
In our base case, oil demand recovers to an average 95.4 million bpd in 2021.
This week, to shape price valuation for the coming weeks, traders will be looking at oil demand clues from OPEC’s view, to be published on Tuesday, and the latest outlook from the IEA, to be published Wednesday.
We see an oil demand downside risk potentially bubbling in India, where the daily number of new Covid-19 cases has reached 169,000, a staggering statistic nearly double compared to last week.
We expect that the Indian government will have to respond with stricter measures, which will primarily weigh on oil products demand for gasoline, diesel, and jet fuel, having a toll on demand and therefore prices.