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2017 Crude Oil Macro Market Dynamics

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World Economic Development

World Economic Growth has gained momentum and its dynamic is reflecting general improvements across the globe. Global growth is forecast at 3.4% for both 2017 and 2018, compared to 3.0% in 2016. After increasing by only 1.7% in 2016, OECD GDP growth has improved and is expected at 2.0% in both 2017 and 2018.

The Eurozone is forecast to grow by 2.0% in 2017 and 2018. India is expected to grow by 7.0% in 2017 and 7.5% in 2018. Brazil and Russia are both forecast to expand their recovery to 0.5% and 1.2% in 2017, respectively, and 1.5% and 1.4% in 2018. China has performed better than expected so far this year and is now forecast to grow by 6.7% in 2017 and by 6.3% in 2018.

At the same time, challenges remain and are mainly related to global political developments and upcoming monetary policy decisions in the US and the Eurozone. Moreover, continuing stability in the oil market remains a key-determinant for global growth.

World Oil Demand

World oil demand growth in 2017 is now expected to reach a level of 1.37 mb/d, anticipated to average 96.49 mb/d this year. For 2018, global oil demand growth is projected to increase by 1.28 mb/d, with the opposite site of total world consumption averaging at 97.77 mb/d.

World Oil Supply

Non-OPEC oil supply growth for 2017 was revised slightly down and currently stands at 57.77 mb/d. The US, Brazil and Canada are expected to be the main drivers of growth, offsetting declines in Mexico, China, Columbia and elsewhere.

Balance of Supply and Demand

Demand for OPEC crude in 2017 is estimated to stand at 32.4 mb/d, some 0.4 mb/d higher than the 2016 level. In 2018, demand for OPEC crude is forecast at 32.4 mb/d, at the same level as in 2017.

Price Movement Dynamics

Oil futures recovered month-on-month, ending July above $50/b. Prices improved as OPEC and non-OPEC countries continued to comply with pledged output adjustments and US stocks declined further, providing more evidence of global drawdown of stockpiles. Bullish product demand, a fluctuation in Nigerian production, weakness in the US dollar, healthy refining margins and improved perceptions user demand, as well as encouraging economic indications regarding China provided further support to crude prices.

Short covering also contributed to the rally in oil futures. ICE Brent ended July $1.59, or 3.4%, higher at $49.15/b, while NYMEX WTI increased by $1.48 or 3.3%, to stand at $46.68/b. From 2017 beginning, ICE Brent is $10.23, or 24.4%, higher at $52.18/b, while NYMEX WTI increased by $9.03, or 22.3%, to $49.50/b.

BRENT/WTI Spread Dynamics

The ICE Brent/NYMEX WTI spread widened despite successive weeks of US crude stock draws. Improvement of fundamentals and the clearing of floating storage in the North Sea supported the Brent market. The Brent-WTI spread widened to $2.47/b in July, representing a 12¢ expansion over June.

In July, short covering positions, rather than long building, has driven oil prices higher, which suggests fund managers are becoming less bearish about prices rather than more bullish. Hedge funds reduced combined short positions in Brent and WTI crude futures and options contracts by 163 mb, according to data published by regulators and exchanges (CFTC, Commitment of Traders report).

The Contango structure narrowed in all markets, verging on sustained backwardation, as the oil glut started to ease. This removed the financial incentive for traders to store barrels, a factor likely contributing to the drawdown of stocks witnessed during the month.

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