Vaccines may not salvage oil market until H2 2021, ‘slow progress’ in store: IEA

London — The International Energy Agency trimmed its oil demand estimate for 2020 on the resurgence of the coronavirus in the West and said it does not expect vaccines "to ride to the rescue" of the market for "some time."

The IEA in its latest monthly oil market report published Nov. 12 said the task of re-balancing the oil market will make "slow progress" as fundamentals remain weak due to the poor outlook for demand and rising production in some countries.

Oil demand will plunge by 8.8 million b/d in 2020, a downward revision of 400,000 b/d from its previous forecast, according to the report. However, demand will grow by 5.8 million b/d in 2021 to average 97.1 million b/d, which includes a small upward revision from last month.

Vaccine impact

Oil prices have surged this week to five-month highs after Pfizer and BioNTech said that their COVID-19 vaccine had proven to be more than 90% effective in a phase 3 trial.

But the IEA said it does not expect a major enhancement in oil demand from vaccines until at least the second half of the 2021.

The IEA assumes that vaccines will be widely available from mid-2021, from which point mobility and oil demand will "return progressively to normal conditions."

"It is far too early to know how and when vaccines will allow normal life to resume. For now, our forecasts do not anticipate a significant impact in the first half of 2021," IEA said in the report.

The Paris-based agency said the vaccine announced this week by Pfizer and BioNTech is unlikely to ride to the rescue of the global oil market for some time. But it said the vaccine would contribute to a demand recovery next year, with a boost expected in the second half of 2021.

"Our outlook continues to assume that vaccines will be widely available by the middle of 2021. Under this assumption, economic activity and thus oil demand should receive a boost in H2 2021," the IEA said.

Demand divergence

The second wave of coronavirus infections in Europe has led to more restrictions on mobility, prompting the IEA to revise down its global demand outlook for this year.

The report said this will "temporarily halt the demand recovery seen in Europe," but it does not think these latest measures will be as significant as in the first wave over March-May.

Demand in Europe will fall by 2.1 million b/d year on year in November, compared with the 4.1 million b/d fall registered in April during the first lockdown, it said.

The divergence of demand between Europe, the Americas and the rest of the world is likely to persist.

"We continue to assume in our outlook that countries will have to fight sporadic resurgences of the virus by implementing social distancing measures," it added. "The accelerating development and eventual deployment of vaccines could reduce uncertainty and support investment and growth next year."

The demand bright spots remain centered on Asia, notably China and India.

Indian oil demand has rebounded sharply as the South Asian country reopened its economy in October.

Indian demand will average 4.6 million b/d in 2020, a fall of 460,000 b/d from the previous year, while demand in 2021 will increase to 4.97 million b/d.

The IEA noted that the Chinese petrochemicals industry "has benefited from strong domestic demand and exports of medical equipment to aid the fight against the virus."

Weak fundamentals

The IEA noted that the re-balancing was occurring at a slow pace. "Physical crude prices remain below futures and this is a signal that markets are well supplied," it said.

Libyan oil output has increased dramatically from around 100,000 b/d in August to 1 million b/d currently following the signing of a permanent ceasefire in the country.

The outlook of rising supply against a slowdown in demand is leading OPEC+ members to consider extending existing supply cuts into 2021.

The IEA said it expected OPEC+ to increase oil output by 240,000 b/d in 2021 versus a decline of 1.3 million b/d this year.

The US will see supply fall by 660,000 b/d in 2021 following a decline of 600,000 b/d this year, it added.

But US production will rebound this month, as more offshore installations reopen after the departure of hurricanes Delta and Zeta.

Stock drawdowns

But despite the weakening physical market, the IEA still expects inventories to fall in the fourth quarter of 2020.

Preliminary data for October shows there will be a steady drawdown in crude stocks in the US, Europe and Japan, it added.

Commercial OECD stocks fell in September and they were below 3.2 billion barrels for the first time since April.

This was also due to a strong descent in stocks in the Americas region caused by lower crude imports and production cuts in the hurricane season.

The IEA now expects 1.7 million b/d of refining capacity to shut down in 2020-21 but warned that "there remains significant structural overcapacity with more than 20 million b/d of capacity still idle."

Refiners are once again facing a precarious outlook after new lockdowns in Europe and elsewhere.

But overall, demand for refined products in the fourth quarter of 2020 will still rise, "reflecting improving mobility and economic activity in India and other developing Asian countries."

Refiners under-produced in the third quarter relative to demand, which helped "ease" some of the overhang, the report said.