Despite an aggressive rollout of coronavirus vaccines in countries around the world, the number of infections keeps on rising.
The fate of the global economy lies in the success of the vaccination programme, but in the short term, there’s no clear end in sight. In Friday trading, Brent crude was priced just above US$56 with West Texas Intermediate (WTI) holding above US$52 a barrel.
Oil demand remains static as fewer people travel and global activity remains curtailed.
In a note from Commerzbank this week, commodity analyst Carsten Fritsch said the reduction in supply is balancing the lack of demand, “preventing the price from falling or rising to any significant extent”.
The additional supply cut of a million barrels a day promised by Saudi Arabia is expected to kick into effect next week.
Fritsch expects the price to remain range bound at these levels as any small recovery should be built into the current price.
The US Federal Reserve left interest rates unchanged at close to zero this week. The bank also intends to continue buying at least US$120 billion of bonds every month in the hope of stimulating the economy.
The chairman of the Federal Reserve, Jerome Powell said “the economy is a long way from our monetary policy and inflation goals”.
Like most governments and institutions, the Fed said it continues to believe that the global recovery path depends on the power of the vaccination programme, as the pandemic continues to cause “tremendous human and economic hardship across the United States and around the world”.
Other economic data from the US this week received a mixed reaction. The US economy shrank by 3.5% in 2020, making it the worst year in terms of economic growth since the second World War.
US GDP expanded at a 4% annualized rate in the fourth quarter of 2020, according to the US Commerce Department.
Third quarter growth
The economy saw growth in the third quarter, but from an extremely low base. Uncertainty in the market has curtailed consumer confidence and the labour market continues to suffer.
The president of Prestige Economics, Jason Schenker says he sees GDP growth rates to slow further to more “normal” quarterly growth levels and adds that it might be late 2021 or early 2022 before real GDP is back to levels seen at the end of 2019. Schenker sees the biggest risks to growth “are high unemployment and joblessness as well as a risk of Covid-19 surges”.
The good news came this week in a report from Wood Mackenzie where it expects global oil demand to rise by close to 7% on the back of sustained vaccines and stronger economic activity.
It’s expecting global oil demand to average 96.7 million barrels a day in 2021.
Looking at supply, WoodMac expects American oil supply to be down by 500,000 barrels a day.
New US government looking at sector
The Biden administration continues to examine oil drilling on US federal land, with the temporary mandate to halt future work already in place.
It’s estimated this will impact about 200,000 barrels a day but in the longer term, investors will be looking at the Gulf of Mexico which is owned by the government. Goldman Sachs cautioned last week that any curtailment in US production could mean higher prices in the year ahead due to tighter supply.
President Biden’s ruling is already under challenge from the Western Energy Alliance, a trade group representing around 200 American oil and gas companies.
The Alliance challenges the authority of the President’s suspension of drilling on federal land, claiming it’s a violation of existing acts and warning of state revenue, economic and jobs destruction.
Whatever happens, policy shifts take time but the greater urgency will be a return to some semblance of normal economic activity. As is clear in terms of energy demand; that’s not an option until the virus is under control around the world.