Sunday 2 April 2017

CHART OF THE MONTH - APRIL 2017 by Dr. Rebecca Harding, Equant Analytics

What does trade tell us about the oil price? 

In the first Trade Outlook of 2017, we pointed to a somewhat negative outlook for oil prices. Although analysts at the time saw prices increasing as demand recovered and production stayed at similar levels, based on our trade forecast for oil, we felt that the picture was at best neutral and maybe slightly negative. This was in line with OECD thinking but the World Bank and the EIU at the time were both suggesting that prices would rise.

The reason for the more negative outlook that we had at the time was because of the very high correlation between world trade values and the oil price (Figure 1). This correlation, of 90%, does not tell us how the oil price will move. It simply tells us that it is highly correlated with trade values, which is reasonable since oil is the world’s third largest traded sector with a value of $1.9 trillion in 2015. However, it does tell us that if trade is projected to remain static, then there is a greater likelihood that oil prices will also remain static. 


Figure 1:   Monthly value of world trade in oil (USDm) vs oil spot price (last price monthly), Jan 2010-Jan 2017

Source:      Equant Analytics, 2017

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