The objective of this article is to identify the indicators to monitor so that global crude oil market (supply, price) can be forecasted better.
1. Current Supply:
Until recently Organization of Petroleum Exporting Countries (OPEC) often set supply through a quota system. OPEC member countries produce about 40 percent of the world's crude oil. Equally important to global prices, OPEC's oil exports represent about 60 percent of the total petroleum traded internationally. Because of this market share, OPEC's actions can, and do, influence international oil prices.However American Shale Oil production doubled between 2011 and 2014 driving down the prices.That created an oil glut. Traders bid the price down to $45 per barrel in 2014.OPEC’s response has been to increase supply and drive down the cost per barrel, so that U.S. shale producers go out of business at lower prices as they would struggle to pay high-yielding bonds they used for financing.
2. Future supply and reserves:
Large oil-producing and oil-consuming countries tend to have reserves of crude oil to keep their economies going in the event that oil prices spike. Oil is stockpiled when the price is low and then spread through the economy to keep prices down when the resource becomes scarce. The U.S. has its Strategic Petroleum Reserve that can be tapped easily, while oil-related allies such as Saudi Arabia also have large reserves that can be tapped.
The Organization of Economic cooperation and Development (OECD) consists of the United States, much of Europe, and other advanced countries. At 53 percent of world oil consumption in 2010, these large economies consume more oil than the non-OECD countries, but have much lower oil consumption growth. Oil consumption in the OECD countries actually declined in the decade between 2000 and 2010, whereas non-OECD consumption rose 40 percent during the same period.China, India, and Saudi Arabia had the largest growth in oil consumption among the countries in the non-OECD during this period.
Rising oil consumption reflects rapid economic growth in these countries. Current and expected levels of economic growth heavily influence global oil demand and oil prices. Commercial and personal transportation activities, in particular, require large amounts of oil and are directly tied to economic conditions. Many manufacturing processes consume oil as fuel or use it as feedstock, and in some non-OECD countries, oil remains an important fuel for power generation. Because of these uses, oil prices tend to rise when economic activity and in turn oil demand is growing strongly. Many non-OECD countries are also experiencing rapid growth in population, which is an additional factor supporting strong oil consumption growth.
While current oil consumption is primarily related to current economic activity, changes in the outlook for future economic conditions can also have an immediate impact on oil prices. For example, an improvement in the economic outlook would tend to increase the chance that oil markets will tighten in the future, resulting in higher expected future oil prices. This change in expectations would be reflected in higher oil futures prices. This rise in futures prices increases the incentive to hold inventories, which in turn decreases available current supply and tends to raise current prices.
4. Supply disruptions due to political events and crises:
Potential world crises in oil-producing countries dramatically increase oil prices.That's because traders worry the crisis will limit supply.
World unrest caused high oil prices in the spring of 2011. In March 2011, investors became concerned about unrest in Libya, Egypt and Tunisia in what became known as the Arab Spring. Oil prices rose above $100 a barrel in early March and reached its peak of $113 a barrel in late April.
The Arab Spring revolts lasted through the summer and resulted in an overturn of dictators in those countries. At first, commodities traders were worried that the Arab Spring would disrupt oil supplies. But when that didn't happen, the price of oil returned to below $100 a barrel by mid-June.
Oil Futures Prices
central banks and the International monetary fund (IMF) mainly use oil futures contract prices as their gauge. Traders in crude oil futures set prices by two factors: supply & demand and market sentiment.
The global GDP growth forecast was revised up by 0.1 percentage points to 3.8% for both 2017 and 2018, mainly supported by advanced economies. US growth was revised up in 2018 to 2.7%, after growth of 2.3% in 2017. Growth in the Euro-zone was lifted to 2.5% in 2017 and 2.2% in 2018. Japan’s growth forecast remains unchanged in both 2017 and 2018 at 1.8% and 1.6%, respectively. While China’s 2017 growth was better than expected at 6.9%, the 2018 growth forecast remains unchanged at 6.5%. A
lso, India’s GDP growth forecast remains unchanged at 7.2% in 2018, after growth of 6.5% in 2017.
World Oil demand:
In 2018, world oil demand is foreseen to reach 98.60 mb/d, representing growth of 1.59 mb/d, 60 tb/d higher than the previous month’s projections and mainly reflecting the positive economic outlook.
World Oil Supply
The most important supply side factors are the US shale oil production, US crude oil stocks and OPEC (Oil producing and Exporting countris) oil supply.
In May 2017 OPEC announced that oil production cuts will be extended till March 2018. This alongwith decreasing US crude oil inventories led oil prices up in the second half of 2017. But the robust recovery of US shale oil production in the recent months will limit price gains in the future.
Any geo political tensions in the crude oil supplying countries affects the world oil supply and consequently will have its upward effect on the prices.
US dollar exchange rate:
The value of US dollar went up by 25% in 2014 and 2015. The strond dollar helped cause some of the 70 percent declines in the price of petroleum for exporting countries. Most oil-exporting countries peg their currencies to the dollar. Therefore, a 25 percent rise in the dollar offsets a 25 percent drop in oil prices. Global uncertainty is one factor that makest the US dollar so strong.
The current price of WTI crude oil at New york mercantile exchange as 13th February 2018 is US $59.36
As per US Energy Information Administration's (EIA) short term energy outlook forecast:
North Sea Brent crude oil spot prices averaged $69 per barrel (b) in January 2018, an increase of $5/b from the December 2017 level. Monthly average Brent prices have increased for seven consecutive months, and, on January 11, spot prices moved higher than $70/b for the first time since December 2014. EIA forecasts Brent spot prices will average about $62/b in both 2018 and 2019 compared with an average of $54/b in 2017.
EIA expects West Texas Intermediate (WTI) crude oil prices to average $4/b lower than Brent prices in both 2018 and 2019. NYMEX WTI contract values for May 2018 delivery traded during the five-day period ending February 1, 2018, suggest a range of $55/b to $77/b encompasses the market expectation for May 2018 WTI prices at the 95% confidence level.