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Crude oil market

Trends on the crude oil market

In early 2016, the downward trend on the crude oil market continued. In January, prices of Brent crude slipped to approximately USD 28/bbl, a 13-year low. After the minimum was reached, prices gradually rebounded with a strong upward trend prevailing until June 2016 when Brent crude topped out at approximately USD 52/bbl, to follow a lateral trend in subsequent months. In November, members of OPEC and certain non-OPEC producers agreed on production cuts designed to limit the persisting oversupply, deplete high inventories and neutralise the consequences of the flow of Iran oil. At year-end, one barrel of crude oil cost approximately USD 57.

Brent oil

A blend of crudes produced from fields in the North Sea

OPEC

Organization of the Petroleum Exporting Countries - associating countries that account for about 40% of global oil production

barrels (bbl)

1 barrel is equal to approximately 0.136 tonnes or 159 litres

Brent crude oil prices

USD/bbl

The average global demand for crude oil in 2016 was 1.4m bbl/d higher than in 2015, at 95.4m barrels per day. Among the world’s largest consumers outside the OECD, the most pronounced increase was observed in India and China – by 7% and 3.5%, respectively. A decline in consumption was only recorded in Oceania and some countries of Latin America. The reasons for higher demand include a very low base price of crude oil. In 2016, the supply of crude oil expanded by 0.4 bbl/d year on year, to 96.1m bbl/d. Non-OPEC producers reduced output in 2016, while production among OPEC members grew to 32.5m barrels, that is 0.8m barrels more than in 2015.

Crude oil demand and supply worldwide

Scrollbar is below the table

bn bbl	Demand		Supply
bn bbl	2015	2016	2015	2016
OECD	46.42	46.62	26.82	26.41
including the US	19.53	19.66	15.12	14.8
non-OECD	47.66	48.81	68.96	69.72
including China	11.28	11.66	4.72	4.46
including former USSR countries	–	–	14.1	14.3
including OPEC	–	–	38.3	39.29
Worldwide	94.08	94.53	95.78	96.14

Source: Thomson Reuters

The main driving factor on the oil market in 2016 were the arrangements between OPEC members to cut global supply. Following numerous announcements and lengthy negotiations, members of the cartel decided to reduce output by 1.8m barrels per day in the first half of 2017.

Outlook for crude oil and natural gas market

A decline in global crude oil supply is expected to markedly affect prices in 2017. A joint and consistent performance of the agreement by all signatories should favour price increases. However, a number of large producers (including the US, China, Canada, Brazil, Libya and Nigeria) made no commitments to reduce output in 2017. In their case, and the US’s in particular, an increase in oil prices may be followed by a major growth in output, which may, at least to a certain extent, compensate for the reduced supply. It should further be noted that inventories of crude oil are very high. To make any meaningful dent, a supply shortage would have to continue for a very long time.

Considering the above, oil prices in 2017 may be visibly higher than in 2016, but are expected to stay within the range of USD 50-60/bbl. Surveys conducted by information agencies among global investors present similar expectations.

Gas prices in Europe were low in 2016 and they are very unlikely to continue at such low levels in 2017. In the second half of 2016, crude prices rallied contributing to an increase in prices of indexed import contracts for natural gas in Europe. Forecasts suggest that this trend may persist in the coming year.

Similar factors drive up prices of import contracts on the LNG market. On the other hand, the expected increase in liquefaction capacities in Australia and the US may curb any LNG price increases and indirectly erode the price of natural gas. Forecasts show that in the coming years an oversupply will affect the LNG market, which may trigger a strong downward trend in prices.

All of the above factors suggest that in 2017 gas prices may be higher than in 2016. The expected growth may be restrained by price competition between traditional suppliers (Russia, Norway) and LNG suppliers entering the European market. As a result, gas prices in Western Europe may oscillate between the level seen in 2016 (approximately EUR 14/MWh) and the prices of futures contracts seen in early 2017 (approximately EUR 18/MWh).

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Crude oil market

Trends on the crude oil market

Brent crude oil prices

Crude oil demand and supply worldwide

Outlook for crude oil and natural gas market