Why a vaccine isn’t a quick fix for oil markets or the economy
After a dismal year, the oil market needs a savior. And while a vaccine may play that role eventually, investors just got a tough reminder of how far there is to go.
What’s happening: Oil prices have skyrocketed this week on news that a coronavirus vaccine could be approved before the end of the year. But the rally looks premature, my CNN Business colleague Hanna Ziady reports.
On Thursday, the International Energy Agency slashed its forecasts for demand in the second half of this year and the first quarter of next year, noting that the resurgence of the coronavirus in Europe and the United States will weigh on fuel consumption.
“Vaccines are unlikely to significantly boost demand until well into next year,” the Paris-based group said.
Early results indicating the Covid-19 vaccine developed by Pfizer and BioNTech is more than 90% effective pushed Brent crude futures, the global benchmark, above $45 a barrel earlier this week — their highest level in more than two months. Traders bet that a vaccine would encourage a return to travel, boosting demand for fuel.
But the IEA forecast is a reminder that the oil market will face continued pressure until a vaccine is widely distributed. On Wednesday, the United States logged more than 140,000 new Covid-19 cases, a record high, while New York’s governor limited gatherings to 10 people.
“The problem is, acceleration in demand will not happen just because of positive news from vaccine trial results,” Bjornar Tonhaugen, Rystad Energy’s head of oil markets, said in a recent note to clients.
Producers agree: On Wednesday, OPEC said that weaker-than-expected demand in the US transport sector and lockdowns in Europe will be a drag on demand for crude this year and next.
“The oil demand recovery will be severely hampered and sluggishness in transportation and industrial fuel demand is now assumed to last until mid-2021,” the group of oil producers said in its monthly report.
The price outlook: Prices may keep edging higher thanks to indications that OPEC members could extend existing production cuts by around three to six months, helping to ease oversupply challenges. But the situation in Europe and the United States is a major overhang.
“As is the case for all commodities, oil is a spot asset that must first clear current supply and demand imbalances before long-dated prices can rise,” JPMorgan strategists told clients last week. “As lockdowns in Europe accelerate and localized outbreaks in the US broaden, oil balances will likely be further tested in the next couple of months.”
These two regions account for one third of global oil demand, according to JPMorgan.
Big picture: The complicated environment surrounding oil prices highlights the difficult calculus for investors right now. In light of positive vaccine news, those taking a longer-term view may start to feel comfortable snapping up risky assets again. But short-term, plenty of stress remains.
A messy Trump-Biden transition is bad for the economy
Economists agree that despite significant progress on a coronavirus vaccine, the US economy badly needs more government relief. But the messy transition of power from President Donald Trump to President-elect Joe Biden makes near-term help look unlikely.
Trump could aid millions of Americans by securing a major economic stimulus package that prevents a wave of layoffs and bankruptcies before Biden takes office, my CNN Business colleagues Matt Egan and Chris Isidore report. With Trump’s attention on challenging the election results, however, pandemic assistance is taking a back seat.
“There is wide agreement that stimulus needs to be done,” Alliance Bernstein economist Eric Winograd said. “But if people aren’t cooperating on the basics, it becomes difficult to see how they can cooperate on stimulus.”
There is a precedent for political rivals teaming up during a crisis.
In December 2008, Republican President George W. Bush approved a $17.4 billion rescue of GM and Chrysler because he didn’t want the auto industry to collapse before Barack Obama was sworn in.
“I feel an obligation to my successor,” Bush said at the time. “I believe that good policy is not to dump him a major catastrophe in his first day of office.”
But economists don’t expect a repeat.
“2008 is a good example of how this is supposed to work,” Winograd said. “It’s clear that isn’t the pattern we are going to follow this time around.”
After the pandemic, should there be a work-from-home tax?
Working at home can be stressful. But there are also benefits, from money saved on transportation to convenience and flexibility — and Deutsche Bank’s research team thinks that after the pandemic, those who choose to stay home should start paying their dues.
“The sudden shift to [work from home] means that, for the first time in history, a big chunk of people have disconnected themselves from the face-to-face world yet are still leading a full economic life,” thematic research analyst Luke Templeman said in a new report. “That means remote workers are contributing less to the infrastructure of the economy whilst still receiving its benefits.”
A Deutsche Bank survey found that after the Covid-19 crisis has passed, more than half of people who tried working from home want to continue it permanently for between two and three days a week. Templeman argues that will hit the broader economy, which was designed to support in-person work.
The answer: To solve for this problem, Templeman proposes a work-from-home tax on 5% of wages. It would be paid by employers if they don’t provide permanent desks, and by employees on a per-diem basis if they make the personal choice to spend part of the week at home. This would be roughly as much as they’d be spending on expenses such as commuting and lunch.
“A tax at this rate … will leave them no worse off than if they had chosen to go into the office,” Templeman said. Governments can spend the money on grants for low-paid workers who aren’t able to do their jobs remotely, he added.
Wait, really? A proposal like this is undoubtedly controversial. But as the nature of work undergoes a generational shift, conversations about the consequences (and costs) of change are only going to become more common.
Up next
Edgewell Personal Care, Pinduoduo and Weibo report results before US markets open. Cisco, Disney and Palantir follow after the close.
Also today: US inflation data from October posts at 8:30 a.m. ET, along with initial unemployment claims for last week. Another 735,000 first-time applications for benefits are expected.
Coming tomorrow: DraftKings, which went public during a difficult time for sports betting, reports earnings.
