Since pharmaceutical companies started announcing vaccine breakthroughs three weeks ago, the oil market has seen the gloom from the soaring coronavirus cases turn into optimism that vaccine availability would help global economic recovery and a rebound in oil demand at some point next year.
Hedge funds and other money managers have been net buyers of the most important petroleum futures and contracts since November 9, when Pfizer and BioNTech started the race to take vaccines to approval within weeks and to people within months.
At the end of the most recent reporting week to November 24, portfolio managers held the most bullish overall position in oil in three months—since the end of August, suggesting that the market hopes that vaccines will help global oil demand.
The overall net long position—the difference between bullish and bearish bets—in futures and options in the six most important petroleum contracts was equivalent to 617 million barrels on November 24, according to data from exchanges compiled by Reuters market analyst John Kemp.
That’s the most bullish net long position in oil held by money managers since the end of August, just before the second COVID-19 wave swept through the United States and major economies in Europe, forcing renewed lockdowns and curfews in the biggest European economies Germany, UK, France, Italy, and Spain, to name a few.
Despite the gloomy outlook for oil in the nearest term because of the virus and continued restrictions in major economies, the oil market has been looking a few months further down the road since vaccine announcements started giving hope to speculators that some form of normality of life and travel could return after the middle of 2021.
The question now is: how much of that hope has been already priced into the recent oil rally over the past three weeks, considering that the actual direct correlation of mass vaccination on oil demand is likely to manifest itself in the second half of 2021, at the earliest.
Hope could sustain oil prices through the first half of 2021, but the market will also have to look at the supply-demand picture, which is less rosy, especially if OPEC+ doesn’t deliver the expected extension of the current oil production cuts. At the time of writing early on Wednesday, OPEC and OPEC+ had adjourned talks about the future of the cuts until Thursday as disagreements persist.
In the week to November 24, money managers boosted their bullish bets on WTI Crude and Brent Crude by 67,000 lots to 542,000 lots—a three and a half-month high. Some of the 183,000 bullish lots added since the first vaccine announcement on November 9 “could be at risk should OPEC+ unexpectedly fail to deliver a cut extension,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, said on Tuesday.
Beyond the OPEC+ group’s immediate decision, oil prices and the mood on the market will also be dictated by the alliance’s decisions all throughout 2021, as well as supply and demand issues.
On the supply side, the risks are skewed to the downside, with oil production from Libya—exempted from the OPEC+ cuts—surging, and Norway ending its oil cuts at the end of this year and adding 134,000 bpd to global oil supply as of January 1.
On the demand side, vaccines could boost oil demand in the latter half of 2021, but a weaker rebound in demand early next year because of the second COVID wave could slow down the drawing down of oil and product inventories which, at least in the United States, are still above the most recent five-year averages.
The speculative positioning in the oil market may look like the most bullish it has been since before the second coronavirus wave, but the vaccine hope rally may have been a bit premature.