The recent increase of crude oil futures prices to the highest level since early March was mostly driven by upbeat sentiment around COVID-19 vaccines but not market fundamentals, according to multiple research institutions and firms.
The understandable euphoria around the start of the vaccination program partially explains higher oil prices but it will be several months before the advent of mass inoculation to economically active people and relevant impact on oil demand, said a monthly oil report released by the International Energy Agency (IEA) on Tuesday.
Global oil demand will have a relatively weak bounce back in 2021, and will remain far below its pre-pandemic levels while suppliers are itching to get back into the market, said a webcast by Mehran Nakhjavani, managing partner of global strategy with MRB Partners Inc. on Wednesday.
Citing weaker jet fuel demand, the IEA report cut the forecast of global oil demand in 2021 by 170,000 barrels per day with oil demand in the first half of 2021 revised down by 300,000 barrels per day.
The positive news on the emergence of an effective COVID-19 vaccine has created a wave of optimism across commodity markets despite the fundamentals extensively being unchanged, said Chris Midgley, global head of analytics with S&P Global Platts.
"We believe the worst is yet to come before we really move to the vaccine having real positive impacts on the fundamentals of energy," said Midgley recently.
U.S. December flash composite purchasing managers' index (PMI) output index covering both manufacturing and service sectors dropped to 55.7 percent from 58.6 percent in November and failed market expectation of 57.4 percent amid rising COVID-19 cases and re-imposed restrictions in many states, according to a report by IHS Markit on Wednesday.
"In the short term, oil demand remains weak and we have reduced our estimate for the fourth quarter of 2020 by 0.2 million barrels per day on small data revisions in various countries," said the IEA.
The recovery of world oil demand in the second half of 2020 is almost entirely due to China's fast rebound from lockdown while global oil demand in the fourth quarter of this year remains 6.2 million barrels per day lower year on year, according to the IEA.
Midgley said that overall, fundamentals will resume the ascendancy over sentiment and Dated Brent oil prices should soften in the near term to the area of slightly over 40 U.S. dollars per barrel.
Midgley forecast that Brent crude oil futures prices would move toward 50 U.S. dollars by the end of 2021 with caution warranted given uncertainties around spare capacity and COVID-19 deployment.
Meanwhile, Nakhjavani said supply overhang will cap oil prices in 2021 and oil prices should be trending broadly sideways next year.
Brent crude oil futures prices would average 49 U.S. dollars per barrel in 2021 up from an expected average of 43 U.S. dollars per barrel in the fourth quarter of 2020, according to the latest short-term energy outlook report by the U.S. Energy Information Administration.
Brent crude oil futures price for delivery in February 2021 continues to stay over 50 U.S. dollars per barrel on Wednesday after closing above the psychological threshold of 50 U.S. dollar per barrel on Dec. 10 for the first time since early March.
Editor: Galia
