An effective vaccine is the lifeline that oil markets and OPEC are waiting for

By Rahul Vaimal, Associate Editor
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The oil market needed a shot in the arm after a string of bad news. Last week, when the pharmaceutical giant Pfizer revealed that its new coronavirus vaccine had demonstrated 90% efficacy in initial trials, it got exactly that.

In the expectation of an end to lockdowns and a resumption of flights, oil prices gained $3 per barrel. The vaccine is good news, but the market needs to come down from its highs for now.

Oil was one of the pandemic’s worst-hit markets, and it was thus favored by the possibility of an end to the crisis. Although the S&P stock index gained just 1 percent on the day of the announcement, US petroleum companies were up 20 percent.

The news from Pfizer and its partner BioNTech was almost the only newest hope in the oil market. In the US and Europe, an increase in virus cases has contributed to the possibility of renewed restrictions. The prospect of the US presidency also raised much concerns.

Due to a weaker world economy, OPEC’s (Organization of the Petroleum Exporting Countries) latest monthly report indicates lower demand for its crude next year than previously assumed. The exporters’ organization is predicting a 9.8 million barrels per day (bpd) decline in oil demand this year and a 6.2 million bpd increase next year which is 0.3 million bpd less than what was expected last month. That means global oil sales next year will be 3.6 million bpd lower than last year.

And this market will be more contested due to production from Libya, an OPEC member not bound by the existing quotas of the group, has rapidly accelerated from almost nothing to 1,215 million bpd following the lifting of a blockade of its ports. To ease its desperate financial condition, Iraq has also returned to over-producing. Iran, too, could see some recovery next year under tight US sanctions if new American President Joe Biden returns to engage with the country.

Under these strains, the next scheduled OPEC conference, set for 30 November, will consider whether the previous plan to reduce cuts by 2 million bpd till next January will continue. More likely, over the first quarter, and maybe the second quarter too it would decide to retain the current cuts.

This would be sensible. It has been recommended that OPEC should move as fast as possible to recover its lost market share, but not faster. It’s likely to be bleak this winter in Europe and the US, with COVID-19 cases, hospitalizations and deaths all soaring.

Vaccine hopes

The Pfizer vaccine is very promising and by the end of this year the company hopes to have it approved for emergency use in the US but concerns remain about the data from the initial trials.

The mRNA approach will be the first ever of its kind, unlike conventional vaccines made from deactivated, weakened or dead infectious agents. Whether the vaccine also prevents asymptomatic infections remains to be proven, while BioNTech’s chief executive is confident that it will.

The logistics are even more overwhelming. The mRNA has the benefit of being quicker to produce. By the end of next year, Pfizer expects to deliver 1.3 billion doses. Of those the EU, the UK and the USA have scooped up almost one billion. Some countries may have to wait for more than a year. And theories of anti-vaccine pseudoscience and conspiracy can also discourage take-up.

A recent survey report from the World Economic Forum found that the number of people who are willing to take a COVID-19 vaccine has dropped marginally compared to the August data.

The Pfizer vaccine is administered in two doses, 21 days apart, and must be stored at -70 degrees Celsius, which makes it nearly impossible for many developed nations to get their hands on it. Immunity might not be long-lasting, perhaps requiring top-up shots annually.

Other vaccines are also being tested, including those from Sinopharm (China) and Sputnik 5 (Russia) which has also claimed a 92% efficiency, both being tested in the UAE, and another mRNA based vaccine from Moderna (US). The vaccine being produced by the University of Oxford and AstraZeneca requires only a single dose, costs only a tenth of Pfizer’s vaccine, and needs to be kept only cold, just above freezing. If issues arise with Pfizer’s product or if it fails to produce enough, these alternatives may be essential.

By the time enough people have been vaccinated in major countries for the pandemic to recede, it may be well into next year. Then when people go out to work, shop and dine, economic activity can recover. Those people who are fortunate enough to have kept their jobs will have considerable savings and be prepared to spend. Flying for holidays abroad would be a welcome relief.

But some patterns will remain, such as conducting most international business by teleconference rather than in-person and working from home more than commuting. Many people and countries will be weighed down by heavy debt loads and some governments will turn to recession, as they did after the financial crisis of 2008-2009, leading to years of slow growth.

Perhaps unexpectedly, as the Pfizer news broke, the oil price volatility narrowed, promptly increasing prices greater than potential delivery prices. However the vaccine would possibly only help to revive demand later next year as reported. This may partly reflect a growing assumption that for now, OPEC will hold the lid on production.

We should be hopeful that one or more vaccines would be a great success, but we should be aware of all potential pitfalls. Thus, it makes it sensible for OPEC to prevent oversupply at the beginning of next year, yet to be prepared to respond quickly if and when demand revives. The oil market has had a bad battle, so it is better not to rush.