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Oil Rallies As Vaccines Emerge

The oil market was in doldrums since March 2020 with the Covid 19 pandemic causing havoc across the globe. After an appreciable 2019, prices nosedived to reach a mindboggling $6.54 per barrel at the peak of the pandemic as nations announced lockdowns with rise in cases. With the passage of time, people were wary of the developing vaccines but once the announcements were out, the markets breathed a huge sigh of relief. The oil markets response to the news of two potentially highly effective Covid 19 vaccines was reflective of the market’s need for a solution. Crude oil rebounded to $46.23 per barrel on November 25, the highest since April 2020.

With the escalation in cases especially in the US and the European economies, traders were expecting a lukewarm price response from the short-term futures contract as against a robust rally from the long-term futures contract. However, the markets rallied for the next few months delivery contracts much higher than those to be delivered in the next few years. The emergence of the vaccines has prompted the usage to be extremely limited as it will be widely unavailable for several months.

In the US and European nations, economies are yet to be operating at pre-pandemic levels. In recent figures, the UK economy was down by 8% (year-on-year) at the end of the third quarter while the Japanese, European and US economies had declined by 3-4% (year-on-year). Although further lockdowns have been announced in Europe and certain US states, the measures are less stringent than earlier ones.

The economy of China has performed better. The GDP growth in the third quarter has returned to 4.9% and industrial activity has advanced to 8-9% in the past few months. Moreover, the fourth quarter growth appears to be quite healthy in the world’s second-largest economy. However, the other emerging economies seem to be still suffering from the pandemic. India and Russia continue to derail their economic numbers and the cases across South America remain significantly higher.

Accounting for about 10% of crude oil consumption, the global airline industry remains in dire straits. According to Transportation Security Administration, air travel remains 63% lower than a year ago in the week ending November 17.

The inventory levels for crude oil and other refined products were declining but remained afloat compared to recent years with the exception of gasoline. On the supply front, OPEC + Russia along with US producers have collaborated exceptionally well in regulating their production in tune with the level of demand.

As the world reopened from the lockdowns during the summer months, coming together became relatively easier for global leaders in the oil markets. However, as the Northern Hemisphere heads towards winter, oil demand has become more variable than the last few years.

When the oil prices crashed in early 2014 till late 2015, OPEC + Russia maintained production proportions for about two years thereafter before the competition for the market share diluted the agreement near the end of 2018. Likewise, after the crash in oil prices during the initial part of the year coupled with continued conundrum state of the global economy, the major players of the oil markets can be expected to continue cooperating to keep a lid on the production well into 2021 and beyond.

Once they are widely adopted in 2021, the vaccines could drive demand for travel among others. The resurgence could trigger a rapid recovery in oil demand. In a likely scenario, the inventories could fall further from its current levels. One of the questions is whether oil prices are exposed to the risks this winter or not? Also, will there be any upside risks later in the upcoming year given that travel could recover more quickly than oil production? The answers to these questions lie to some extent on the economic stimulus by major economies.

Without any fiscal support from the US, EU and other economies around the world, the picture is not clear if the revival of consumer demand for travel and other products and services will invariably be enough to generate a strong economic recovery. The answer lies in 2021 and we as traders and financial market enthusiasts will be looking forward to it.

Vivek Risal is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at r&[email protected]

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