Africa’s Euphoria about oil prices is justified

Photo by Zbynek Burival on Unsplash

Introduction.

Oil prices have risen precipitously due to vaccines, inoculations, and the gradual reopening of borders across the world. American regulators found the vaccines from Johnson and Johnson to be safe and effective and should arrive in the U.S. as a lower-cost option in United States within days. Other vaccines from AstraZeneca have been equally manufactured and shipped to Ghana, the first recipient under the COVAX category. The 600, 000 doses have been produced by the Serum Institute of India after Ghanaian officials proved that their infrastructure was sufficiently developed to innoculate its citizens across the country.

Admittedly, Moderna announced a booster shot that is effective against the variants found in South Africa and the United Kingdom. News of vaccines and the gradual reopening of economies across much of Europe and North America have supported the recovery in oil prices.

At the height of the lockdown, oil prices plummeted meanwhile a real-world study undertaken by Pfizer in Israel shows its vaccine is effective at 94% at preventing symptomatic COVID-19. Positive vaccine news and a gradual economic recovery across the globe are evident, with the IMF revising-up its GDP forecast for Latin America to 4.1% from 3.6%. Meanwhile, the financial support provided by the IMF is estimated at $66 billion to 21 countries.

What’s driving Rally in Oil Prices?

As outlined in the paragraphs above, news about successful vaccine development and inoculations buoyed investor sentiment, supported by ultra-accommodative interest rates. As economies gradually inoculate their citizens and re-open economies, the projected recovery in the service sector will cause a greater demand for energy products. Furthermore, this will be supported by the recovery in industrial activity across the globe as countries reduce lockdown measures and economic activity resumes. The rollout of vaccines, however heterogeneous, will boost demand for goods and services that were previously unavailable during the lockdown. Meanwhile, the U.S. driving season is fast approaching, which will equally boost demand for energy products.

Several vaccine candidates are currently being used to inoculate citizens across advanced, emerging, and developing market economies. This span Pfizer/BionTech, AstraZeneca, Johnson and Johnson, Sinopharm, and Russia’s Sputnik V vaccine. Admittedly, news of vaccines across the globe has boosted optimism across asset classes, supported by accommodative interest rates and unprecedented asset purchases from central banks. The disconnect between the financial sector and the real economy is apparent in most countries across the globe.

The positive fallout from Quantitive Easing (QE) from central banks, worth $17 trillion, has caused a rally in asset prices, even as the major market has only recovered slowly and fiscal policies are estimated at 5.3% of GDP in advanced economies. If one disentangles the macro drivers from the micro factors, it is safe to assume that the rates of vaccination and the adjustment of supply chains to a post-COVID world will play an indispensable role in determining the demand for crude oil in the near term.

The most recent OPEC meeting was equally instructive in the future trajectory of oil prices. The Organisation of Petroleum Exporting Countries (OPEC) decided to maintain output restrictions in an attempt to boost oil prices, or at the very least provide support to the current bull run. On the one hand, the economic recovery and resumption of economic activity suggest that oil prices will rally as consumption returns online and consumers begin traveling on the back of borders reopening across the globe. In 2020, OPEC+ agreed to reduce oil production by a record of 9.7 million barrels per day (mb/d), before easing to 7.7 m/bd and eventually 7.2 mb/d in January. Production will, therefore, remain stable through April 2021, supporting oil prices in the near term.

Compliance amongst OPEC members will be key to supporting the price momentum

The rates of compliance in recent months have been high and Saudi Arabis will continue to caution OPEC members to adhere to output restrictions in other to ensure the rally continues unabated. The question remains whether the rally will taper off as consumers begin to slow down purchases for energy products, or the supply chain re-adjust to a post-COVID trend of purchases. It does not seem so just yet, if one looks at retail sales and vehicle registration sales across major economies, one can see an uptrend that will only be supported by the 1.9 trillion stimulus plan in the U.S. and a raft of jobs programs across advanced economies.

The largest economy, the United States of America, has recorded a surge in retail sales to 5.3% in February, bringing the yearly average to 7.4%. Meanwhile, vehicle registrations have equally risen by 0.91%, which suggests that demand for crude will continue to rise. More importantly, industrial production in countries such as China and South Korea equally points to a positive trend, whilst the manufacturing of vaccines in India will equally cause oil demand to rise.

One can remain circumspect about the extent, if at all, of a protracted recovery in oil prices, but several drivers will determine the future trajectory of oil prices. In February, U.S. retail sales rose 5.3% every month, bringing the yearly rate to 7.4%. Meanwhile, industrial production in China rose by 7.3%, from 7.0% y/y in November. China is one of the largest importers of petroleum products and industrial activity has a bearing on oil prices. Conversely, another major oil importer, South Korea, saw industrial production fall for the first time in 20 years, while output across manufacturing rose 0.5%.

Admittedly, one month does not a trend make and the five-tier social distancing caused production and lodging to fall by 18.5% as the government heightened lockdown measures. Meanwhile, retail sales rose by 0.2%, after falling 0.1%in October 2020. South Korea is a resource-heavy country with a sprawling manufacturing and industrial sector, salient to its tech, electronics, and manufacturing supply chain. The rates of compliance in recent months have been high and Saudi Arabis will continue to caution OPEC members to adhere to output restrictions in other to ensure the rally continues unabated. The question remains whether the rally will taper off as consumers begin to slow down purchases for energy products, or the supply chain re-adjust to a post-COVID trend of purchases. This is not evident; This is not evident, if one looks at retail sales and vehicle registration sales across major economies, there is a noticeable uptrend that will only be supported by the 1.9 trillion stimulus plan in the U.S. and a raft of jobs programs across advanced economies.

The largest economy in the world, the United States of America, has recorded a surge in retail sales, estimated at 5.3% in February, bringing the yearly average to 7.4%. Meanwhile, vehicle registrations have equally risen by 0.91%, which suggests that demand for crude will continue to rise. More importantly, industrial production in countries such as China and South Korea equally points to a positive trend, whilst the manufacturing of vaccines in India will equally cause oil demand to rise. One can remain circumspect about the extent, if at all, of a protracted recovery in oil prices, but there are several drivers that will determine the future trajectory of oil prices.

In February, U.S. retail sales rose 5.3% every month, bringing the yearly rate to 7.4%. Meanwhile, industrial production in China rose by 7.3%, from 7.0% y/y in November. China is one of the largest importers of petroleum products and industrial activity has a bearing on oil prices. Conversely, another major oil importer, South Korea, saw industrial production fall for the first time in 20 years, while output across manufacturing rose 0.5%.

Admittedly, one month does not a trend make and the five-tier social distancing caused production and lodging to fall by 18.5% as the government heightened lockdown measures. Meanwhile, retail sales rose by 0.2%, after falling 0.1%in October 2020. South Korea is a resource-heavy country with a sprawling manufacturing and industrial sector, salient to its tech, electronics, and manufacturing supply chain.

Oil prices will remain bullish in the near term as economic activity gradually recovers on the back of vaccines and the relaxation of lockdown measures. Major crude importers will equally see a surge in demand, providing support for futures, that will likely see some backwardation as the rally tempers. However, as industry, travel, and domestic consumption recovers, oil prices will remain at current levels. Based on the current demand-supply balance, OPEC output restrictions, and a gradual recovery in industrial activity, WTI and Brent will likely average $60 — $65/bl and $65 — $70 per barrel. This range will encompass changes in cyclical trends such as investments in the U.S. oil and gas sector, a resurgence of oil wells, heterogeneity in vaccine distribution, and domestic consumption.

Conclusion

COVID-19 has illustrated the challenges associated with macroeconomic forecasting, but the conservative modeling and associated price points vis-à-vis domestic demand and oil futures suggest that the above forecast reflects a mix of macroeconomic dynamics and systemic country-specific factors. Africa will benefit from higher oil prices as it comprises the majority of its exports. Not only will it provide greater avenues for public sector spending, but it will also equally reduce the risk of defaults, anchor currencies across the continent, and reduce the negative spillover of COVID-19 on African economies. Furthermore, higher oil revenues should be used to diversify economies, equip the labor force with 21st-century skills and support the private sector.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store