Last week’s news of an effective Pfizer vaccine in the final stages of development lifted oil prices, with the U.S. benchmark WTI Crude returning to above $40 a barrel.   Oil prices rallied by 10 percent on Monday, November 9, after Pfizer and BioNTech announced 90-percent efficacy of their COVID-19 vaccine candidate. This past Monday, prices jumped again after Moderna said that the Phase 3 study of its vaccine candidate had met statistical criteria with a vaccine efficacy of 94.5 percent. 

Both WTI and Brent have been the top-performing commodities since Pfizer and Moderna announced progress in vaccines. Yet, a proper rally in oil has failed to materialize as the initial market euphoria that a vaccine could be on a fast-track to approval gave way to the grim reality in the near term, in which a vaccine would not be immediately available to many people in the world. Longer-term hopes for a COVID vaccine have been replaced by the weak short-term fundamentals and oil market prospects. Renewed lockdowns in major European economies, stricter measures even in the COVID response outlier Sweden, and soaring coronavirus infections across the United States are set to drag oil demand lower in the last quarter of the year and delay the elusive oil market balancing. 

More than a vaccine rollout, probably after the middle of 2021, the oil market is now looking to the shorter term—how much oil demand the second wave might erase and how much the OPEC+ group would be willing to sacrifice in terms of oil production (and oil revenues) in order to help the fragile oil demand recovery to return on track. 

The Pfizer vaccine news sent oil prices surging on November 9, but the commitment of traders (COT) report from exchanges with data for the week to November 10 showed that most of the rise in bullish positions in oil was the result of short-covering instead of any renewed optimism about oil’s short-term prospects. 

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Hedge funds and other money managers were net buyers of the equivalent of 114 million barrels in the six most-traded petroleum contracts, according to exchanges data compiled by Reuters market analyst John Kemp. Hedge funds mostly bought petroleum contracts to close out shorts, with 89 million barrels in short positions bought out of those 114 million barrels of buying in the contracts. The oil price move in the week to November 10, which included the day of the Pfizer vaccine news, was largely the result of a short-covering rally after funds had positioned a lot of shorts at the start of the new lockdowns in Europe and ahead of the U.S. presidential election in the week to November 3. 

“Hedge funds cut bullish oil bets ahead of the U.S. election and with rising Covid-19 cases they were unprepared for today’s news, hence the strong upside reaction through short-covering and fresh momentum buying,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, said on November 9.

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“The vaccine news triggered a 10% rally in crude oil which supported a 17% increase in the net-long WTI and Brent crude oil position to 420k lots, still well below the six month average at 497k lots,” Hansen said, commenting on the COT report on Tuesday. 

So, market participants did not suddenly turn much more bullish on oil, as vaccine hopes for well into 2021 are countered by the bearishness in the shorter term, due to new lockdowns and expectations of a double-dip recession in Europe on the demand side, and rising Libyan oil production on the supply side.  

“With a Covid-19 vaccine unlikely to ride to the rescue of the global oil market for some time, the combination of weaker demand and rising oil supply provides a difficult backdrop to the meeting of OPEC+ countries due to take place on 1 December,” the International Energy Agency (IEA) said last week in its November Oil Market Report, in which it cut its oil demand estimates for Q4 2020 and for the whole of 2020, as well as for Q1 2021. 

The OPEC+ group is reportedly leaning toward a three-month extension of the current cuts, with the decision expected on December 1. The oil market has largely priced in such an extension, so oil bulls will likely need supportive news from the demand side in the next few months for oil prices to break above the current low-$40s range.

By Tsvetana Paraskova for Oilprice.com

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