Tag Archives: Oil

April – Trade Outlook

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

The trajectory for oil prices since January has been downwards reflecting the flatter pattern in world trade.  Last month highlighted the difficulties of predicting oil prices. In the middle of the month, oil prices had fallen 10% in one week to their lowest level since OPEC cut production in November 2016. In the last week of the month, prices had rallied with the best week so far in 2017. A Reuters poll at the end of March suggested that analysts were not expecting oil prices to rise to $60 a barrel until 2018 at the earliest. But with the trade outlook flat for 2016 and 2017 and growing only slightly into 2017-18, the prediction of $60 a barrel in the near term would appear to be only possible were there an unexpected dose of market hubris! (Figure 2)

Figure 2            Projected growth in total world trade vs world trade in oil year on year (2016-17 and 2017-18)
Source: Equant Analytics 2017

There are two key issues. The first is whether demand is increasing relative to production. As the US increases its output of shale, there is little doubt that the US itself will be able to meet its domestic demand, taking market share from OPEC and non-OPEC aligned producers. This will keep prices flat during the course of the year if this pattern continues and, potentially at least, push prices downwards if the OPEC producers decide to go for an all-out price war when they meet in May. Falling projected global trade in oil suggests that demand will be at best weak relative to prices.

The second is the shift in the patterns of production in the market. This is evident in how trade has grown over the past five years and how it is projected to grow over the next five years (Figure 3).

Figure 3           Selected mineral fuel trade vs electrical energy growth 2010-15 and 2016-21 (CAGR %)
Source             Equant Analytics, 2017

The prospects for growth in each mineral fuel sector is more positive from the second period with 2016 as its base compared to the post-crisis period. However, only trade in petroleum wax, coke and bitumen and bitumen and shale show positive annualized growth and the most substantial projected growth is in the bitumen and shale sector. Although electrical energy’s decline in trade growth is projected to slow, it is still a very small sector compared to other mineral fuel sectors and its improvement does little to suggest that a major change is on its way.

What this suggests is that the oil sector as a whole is likely to dominate for some time to come despite environmental pressures. Demand is growing, but it appears that it will be met by current energy sources rather than new ones. The greatest improvement in trade growth over the two time periods is in bitumen and shale and this corroborates the view that US shale production, increasingly cost effective as it is, is likely to compete favourably in oil markets with crude and refined oil to meet the growth in demand, particularly in the US itself.

 

 

February – Graph of the Month

6th February 2017

Where will the biggest impact of President Trump’s Executive Actions be? The Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TPP) look to be things of the past. The North America Free Trade Area (NATFA) will be undermined by the ongoing diplomatic and trade disputes with Mexico.

Yet US trade openness, that is trade as a percentage of GDP, was, on average between 1980 and 2013, 18.6%. Compared to a global average over the same period of around 45%, this just demonstrates the size of the US domestic economy – US jobs are created domestically to a greater extent than they are from trade. It follows that it will be global trade, the flows and patterns of trade around the world that will be transformed if the decisions translate into real action.

Figure 1:          Annualised growth in US trade with top ten partners and regions, 2015-2020 (%)
Source:            Equant Analytics, 2017

However, the US will not necessarily be the main beneficiary of the “bilateralism” of its trade policy. Longer term growth to 2020 presents US trade policy with several issues (Figure 1) irrespective of the intent behind recent changes:

  • Imports from Asia Pacific will grow at over 1.5 times the rate of exports to Asia Pacific. China is the exception, where exports will grow more quickly than imports. But as the US imports from China at nearly five times the rate that it exports to China, the faster rate of export growth is unlikely to have much long term impact on US net trade.
  • Exports to NAFTA look likely to increase more rapidly than imports. NAFTA works well for the US and any trade war with Mexico or disintegration of the regional trade area could damage US exports as much as it hurts Mexico.
  • Germany argues that the ECB keeps interest rates low which keeps the Euro low; President Trump argues that Germany benefits from the low value of the Euro and certainly the US will be importing from Germany at nearly twice the rate of growth that it exports to Germany. We expect faster growth in US imports from both the EU27 and the Eurozone as well.
  • Howsoever great the desire may be to create a bi-lateral trade partnership between the UK and the US, the UK is the US’s sixth largest country trading partner and, as an export destination less than half as important as either China or Mexico. The momentum of trade to 2020 suggests that nothing between the two countries will change.

If the policy is to support US jobs, then the sectors that China and Mexico trade with the US are important indicators of how effective this policy will be.

China’s imports into the US are predominantly in electrical equipment (cameras, audio-recording equipment etc) and the levels are substantially higher than they are for US exports to China in the same sector. However, within the broad grouping of “electrical equipment” are a range of products and the US exports to China in products that are higher at the value chain in both computing and machinery and electrical equipment.

 

Figure 2:          US trade with China by top import sectors, 2016 (USD bn)
Source:            Equant Analytics 2017

The other two top sectors for Chinese imports include furniture and bedding, toys and clothing, and potentially this reinforces the economic nationalism that is now reflected in US trade policy.

On one level there is truth in the statement that the US has exported many of its low and middle skilled jobs to China. This has been deliberate policy and was the product of the “globalization” which drove company performance and which is now likely to be thrown into reverse.

Yet, China is the USA’s third largest export partner by country and its exports are worth $150.6bn to the US economy a year. Most of this export trade is at the high end of the value chain (semi-conductors, aerospace, pharmaceuticals, biopharmaceuticals and automotives) and as such, reflects the strongly research and skills intensive nature of US trade that has evolved through the process of globalization.

Mexico, in contrast, is a key part of a North American value chain in oil and gas, electronics, computing and machinery and automotives in particular. These are the top four import and export sectors between the US and Mexico (Figure 3).

 

Figure 3:          Top four traded sectors between the US and Mexico, annualized growth, 2015-2020 (%)
Source:            Equant Analytics, 2017

Other things being equal, the trade momentum on the face of it at present looks positive for the US: export growth is higher than import growth in electrical equipment and oil and gas, and while import growth is faster in computing and automotives, against the backdrop of a considerable deficit with Mexico, the US itself is exporting equipment to fuel Mexican infrastructure development at a rate of nearly twenty times the rate that it imports. This is again the process of globalization and has been the case since the mid 1990’s.

The drop in oil and gas imports from Mexico presents a double-edged sword potentially. The US has not exported its crude oil historically and although this changed under President Obama, there is still no recorded data in United Nation databased to confirm that it now exports crude to Mexico.  However, it exports refined oil back to Mexico at four times the level that it imports it. Mexico has been accelerating its oil refining capacity over the last 2-3 years and the drop in imports potentially reflects both an increased self-sufficiency in the country and a loss of export revenue to US oil and gas companies.

The implications for global trade that are emerging as a consequence of the way in which US trade policy has been articulated since the inauguration of President Trump are not all about avocados, although even here there is an expected slowing momentum from 7.5% growth in 2016-17 to just over 4% by 2019-20! What is at risk, however, is that already the momentum of trade between the US and its key partners appears to be slowing.

The slowdown reflects flatter global trade growth and the increasing localization/regionalization of global supply chains. Any policy that seeks to disturb what is already a fragile equilibrium, may well cause the tectonic plates of trade to shift permanently.

 

January – Graph of the Month

Equant Analytics
4th Jan 2017

The picture for global trade in 2017 is uncertain and likely to be dominated by the politics of trade rather than the economics. We are expecting values in world trade to increase in 2017 by less than 0.3% with 12 out of the G20 countries set to see either exports or imports, or both, shrink during 2017 (Figure 1). While we are expecting China’s exports to grow at over 4% this year, this is a long way from the heady days of 2010 and 2011 when trade grew at twice the level of GDP.

In the wake of the Brexit referendum, the UK’s exports are expected to see flat or negative growth in 2017. Similarly, imports are expected to increase only slightly. This is simply a function of the weaker sterling pushing export prices down and import prices up, but it sends a worrying signal for economic performance more generally as the effects of Article 50 are felt and broader uncertainty around investment begins to take hold.

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Figure 1:  Forecast G20 import and export Growth, 2016-17 (%)
Source:    Equant Analytics 2017

We are expecting the values of trade in mineral fuels (oil and gas),chemicals and precious metals (particularly gold) to fall back in 2017 (Figure 2).

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Figure 2:          Forecast trade growth: Top ten trade sectors globally, 2016-17
Source:    Equant Analytics 2017

This tells us two things: first, this forecast suggests that commodity prices will not increase significantly during 2017. The drop in the value of mineral fuel trade indicates that both global demand is slowing and that oil prices are not likely to rise much above their current levels during the course of the year. Secondly, the fact that precious metal trade is either static or falling back slightly may indicate that gold will not be used as a hedge against uncertainty in the way that it was in 2016. This is to be expected as interest rates in the US start to rise and yields elsewhere start to increase.

However, not all sectors are likely to see negative growth and consumer-driven sectors from cars through to aircraft are seeing robust, even substantial growth. This may provide a lead indicator that demand-led growth, particularly in China but also in the Middle East, may well turn out more positively than expected.

Where are the risks in 2017?

The risks in 2017 are likely to be politically driven. Figure 1 suggests that US imports are likely to fall back. With the Trump administration already beginning to alter its trade stance within the North America Free Trade Area and to increase its rhetoric about re-shoring jobs from China, this is unsurprising. Similarly, exports values will be higher simply because the Dollar will be stronger as interest rates increase.

Figure 1 also shows that Saudi Arabia’s exports are likely to increase. This has little to do with the price of oil and more to do with the fact that Saudi Arabia is increasingly trading with China rather than with the US. Saudi Arabia’s exports to China are now some $US 5bn higher than the value of its exports to the US and recovered more quickly from the drop in oil prices in 2015. The re-orientation of trade arguably marks a shift of Saudi Arabia in particular away from trade with its traditional partners.

However, although export trade in the MENA region is forecast to grow, imports are forecast to fall and this is a similar picture in Sub-Saharan Africa and South America (Figure 3).

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Figure 3           Forecast regional trade growth, 2016-17 (%)
Source:    Equant Analytics 2017

Demand growth, suggesting some form of economic recovery, is evident in Europe, Asia-Pacific (driven largely by China) and North America. However, the emerging regions like South America, MENA and Sub-Saharan Africa may see their imports fall back. This suggests that demand in these regions is weaker, reflecting weaker economic performance in 2015 and 2016. Similarly, bigger economies in the Asia Pacific region, such as Indonesia, Japan and Australia are also seeing weaker trade, showing the sustained underlying weaknesses in that region as well.

This is a real challenge for global growth. Emerging markets will be affected by the strength of the US dollar as interest rates rise and inflation builds in the US. US Dollar denominated debt will become more expensive and much of the strength of the North America region will be defined by politically-induced exchange rate effects rather than stronger economic performance in itself. 2017 looks to be an interesting year in every sense of the word, and much of this will be played out through the politics of trade.