This has been a rough year, but there’s some great news in the fight against COVID. At least two vaccines (one from Moderna and the other from a Pfizer/BioNTech tie-up) appear highly effective based on preliminary results. Just as important, the two vaccines could be available for tens of millions of individuals as early as December, with “wide” availability expected by April. More prophylactics may be on route, as 10 more vaccines are in large-scale efficacy tests. The Astra Zeneca/Oxford vaccine could potentially provide hundreds of millions of doses at very low cost, although initial results are scrutiny.

The development and deployment of two vaccines is hugely positively news for U.S. and world energy markets. Assuming widespread vaccine uptake, the U.S. could have highly manageable COVID caseloads as early as June of next year. By this time next year, life in the U.S. could approximate “normal” conditions again, with little to no constraints on mobility – or energy demand. We also believe that the risk of a spring crude products glut (especially for diesel) has been reduced by the vaccine – although refineries may maintain relatively high run rates through the winter in anticipation of higher post-vaccine demand. Finally, in a highly positive development for the entire O&G complex, 2021 jet fuel demand could set monthly records in the post-vaccination period. With jet fuel demand rebounding, the Permian’s light, tight oil could become more valuable.

Still, there is a long way from here to there: this winter is going to be highly difficult, and U.S. energy exports will remain hampered so long as the virus is not eradicated overseas, particularly in key consumer markets such as Europe and Asia.

Winter Reality Check

While the COVID vaccine developments are unambiguously good news for U.S. energy markets, let’s take a step back and dispassionately apprise the next few months. Even with the vaccine news, COVID still represents a grave, near-term threat to domestic energy demand. Even if authorities can vaccinate 30 million Americans by the end of the year (a very ambitious target), COVID cases are extremely likely to continue to surge across the U.S. Rising caseloads will likely lead to voluntary and involuntary economic/mobility curtailments, constraining energy demand. Furthermore, even in the best-case scenario, most of the U.S. population won’t be able to receive a vaccine during the peak COVID winter months. COVID will continue to constrain energy demand during the winter, especially for crude and crude products.

As we wrote previously, this winter could add to crude product inventories – especially for diesel. While vaccine developments leave us more optimistic, we could still see growing inventories this winter. (especially in terms of days-of-supplies). Since energy demand is expected to rebound in the spring, refineries will be even more reluctant to shut down. We still expect a glut of crude products this winter, but vaccine deployment is expected to gradually return mobility levels to more normal conditions, limiting crude products oversupply.

But domestic demand risks… are largely to the upside

Two other vaccine factors could contribute to energy demand. If additional vaccines are deployed (domestically or internationally), more individuals will achieve COVID immunity faster – helping return the economy and mobility back to normal. As of this writing, at least two vaccines will likely receive approval (there are still questions surrounding the efficacy of the AstraZeneca/Oxford vaccine). If more vaccines are proven effective, the rate of vaccination uptake could increase, ensuring that consumer mobility rebounds more rapidly. For example, if, say, an additional three vaccines are approved, the monthly vaccination rate could increase from ~20 million Americans every month to ~50 million per month, defeating the virus sooner and enabling U.S. energy demand to rebound faster.

The vaccines’ properties could also contribute to a more rapid recovery. In an ideal scenario, the vaccines could not only prevent the recipient from contracting the virus – they could also prevent individuals from transmitting the virus. We simply won’t know until more data is collected. If we achieve this “ideal scenario” of contraction + transmission immunity, then vaccination herd immunity could be obtained very rapidly.

On the other hand, there’s a risk that many Americans will simply refuse to take vaccines, regardless of the personal and societal benefits of vaccination.

Jet fuel recovery expected, benefitting U.S. upstream producers

We expect jet fuel demand and passenger throughput to remain around historic lows through most of the winter, followed by a gradual rebound that will accelerate as vaccinations lower COVID risks. Jet fuel demand and passenger throughput could reach all-time highs next summer if the vaccination campaign delivers results quickly (and if airline capacity returns to meet growing demand). Rising jet fuel demand will also allow refineries to pursue more balanced output of crude products, which will simultaneously increase demand for Permian/Bakken light grade crudes which favor gasoline and jet fuel. Subject to the availability of affordable capital, we expect more rigs to come online over the next several months as a result of the vaccine news. However, we also share concerns that growing ESG investor considerations will make it tough for the oil and gas sector to access capital.

When will critical export markets receive vaccinations?

During this discussion of vaccinations, one critical piece has been left out: the international environment. About 95% of humanity lives outside of the United States and accounts for 75-80% of world GDP. About 12% of U.S. GDP is directly attributable to exports, around 25% of domestic crude oil output is shipped to international markets, and LNG/PNG natural gas exports typically account for somewhere between 10-20% of all gas production, depending on seasonal variations. While the domestic market is most important for the U.S. O&G complex, conditions won’t return to normal until export markets are also healed.

As of this writing, we expect that international markets will lag U.S. vaccination rates by several months. Europe, a critical location for U.S. crude and LNG exports, has access to the Pfizer/BioNTech vaccine, as BioNTech is a German company. Development of other vaccines, such as the Oxford/AstraZeneca vaccine, will prove critical in mitigating international COVID cases. As we’ve said from the beginning of this crisis, COVID dynamics will determine all economic/energy outcomes. We will continue to monitor vaccine deployment in both the United States and abroad.

Domestic Strength, Soft Exports?

The next few months will be difficult for nearly every country due to COVID. We expect additional economic and mobility curtailments in the pre-vaccine period, limiting energy demand and possibly giving rise to a glut in some crude products, such as diesel. Deployment of vaccines could rapidly alter this dynamic, however. With the United States expected to vaccinate tens of millions of individuals every month, economic demand and mobility could come roaring back next year. We may even see what some economists have termed “revenge consumption,” where consumers purchase big-ticket items such as vacations, appliances, etc. These dynamics would be enormously positive for energy demand. At the same time, the international environment will remain uncertain for some time, as vaccination uptake rates are expected to be slower overseas.

It is early days in the COVID vaccination campaign – and information could change rapidly. We will continue to track this story closely and report its implications for energy markets.