22/05/2016 07:24 AST
Strong growth in demand and further production cuts from the US should continue to erode the supply glut in global oil markets. The oil prices will average $41/b in 2016, rising to $51/b in 2017, QNB said yesterday.
Analysing “What is behind the latest rebound in oil prices?”, QNB’s weekly economic commentary noted oil prices have had a volatile start to the year. The prices collapsed 25 percent to $28/barrel in the first 20 days of 2016, but then rebounded strongly and are now up 33% year to date at $49/b. Our analysis suggests that demand factors have been entirely responsible for the rebound in oil prices, offsetting supply increases.
A simple way to distinguish between demand and supply factors is to look at their impact on oil and stock prices. Higher global demand or expectations for higher demand, due to stronger growth for example, will push up oil prices. It should also boost the earnings of companies, leading to higher stock prices. On the other hand, higher oil supply (or expectations that supply will increase) will reduce oil prices, but, it should also lead to lower energy costs, higher corporate profits for non-oil companies and consequently rising stock prices of corporates outside the energy sector.
Therefore, the co-movement between oil and stock prices provides a basis for identifying demand and supply shocks. If oil and stock prices move in the same direction, we interpret this as being caused by a demand shock. Conversely, if they move in opposite directions, we interpret this as being driven by an oil supply shock.
“Each day we attribute the change in oil prices, either to changes in expectations of global demand (if oil prices and stock prices move in the same direction), or to changes in expectations about oil supply (if oil prices and stock prices move in different directions). We then add up the change in the oil price that is attributable to global demand and the change that is attributable to oil supply over a period of time. Our methodology suggests that the increase in oil prices from 21st January until 16th May was entirely attributable to stronger demand. Supply was actually a drag on prices over this period”, QNB analysts said.
According to the research, the outlook for demand improved after a bad start to the year. From the second half of January, a number of risks that had been priced into financial markets abated. Concerns about slowing global growth and devaluation in China led to an 11 percent fall in global stock markets and was partly responsible for the collapse in oil prices. However, from 21st January, easier global monetary policy and stronger economic data calmed markets.
Both the European Central Bank and the Bank of Japan eased monetary policy and the US Federal Reserve took on a more dovish stance, lowering its projections for interest rates. In terms of better economic data, activity in the US and China picked up and the Chinese renminbi stabilised. These factors combined to improve the outlook for global growth, boosting expected demand for oil and raising prices.
QNB’s analysis suggests that the recovery in oil prices has actually been held back by higher-than-expected supply. This is mainly due to increased Iranian production, which rose 0.6m barrels per day since the lifting of sanctions. In addition, the failure to reach an agreement to freeze oil production among major oil producers in Doha contributed to the drag from supply.
This has been sufficient to more than offset lower US production (due to cutbacks in shale oil fields) as well as recent disruptions to production in Kuwait (oil worker strike), Nigeria (militant attacks on pipelines), Canada (wildfires) and Venezuela (power cuts and political instability).
The recent rebound in oil prices was mainly driven by the alleviation of risks in financial markets. An improvement in risk appetite since late January has boost
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