Oil prices drop as near-term demand concerns overshadow COVID-19 vaccine hopes

US oil prices fell in early trade on Tuesday as concerns over demand in the near term in coronavirus-hit economies in Europe and the United States returned to haunt the market after an overnight surge on progress towards a COVID-19 vaccine.

US West Texas Intermediate crude futures dropped 81 cents, or 2%, to $39.48 a barrel at 0029 GMT, having jumped 8% on Monday, its biggest daily gain in more than five months, after drug-makers Pfizer and BioNTech said an experimental COVID-19 treatment was more than 90% effective based on initial trial results.

“A viable vaccine is unequivocally game-changing for oil – a market where half of demand comes from moving people and things around,” JP Morgan said in a note

“But as we have written previously, oil is a spot asset that must first clear current supply and demand imbalances before one-to-two-year out prices can rise.”

Rystad Energy said lockdowns in Europe could result in the loss of a further 1 million barrels per day of oil demand by the end of this year, while it would take several more months before a vaccine would be available.

“The fast-tracking of multiple vaccines doesn’t mitigate the risk that many US states will have to return to some form of lockdown this autumn/winter,” Rystad Energy’s head of oil markets Bjornar Tonhaugen said.

Tuesday’s decline was tempered by comments from Saudi Arabia’s energy minister, who said on Monday that the Organization of the Petroleum Exporting Countries (OPEC) and its allies, together known as OPEC+, could take more oil off the market if demand slumps before the vaccine is available.

OPEC+ agreed to cut supply by 7.7 million barrels per day from August through December to help support prices and then ease the cut to 5.7 million bpd from January.

OPEC+ is set to hold its next meeting on November 30 and December 1.