Kemp: Global Trade Upturn Aids Oil Market Rebalancing



Kemp: Global Trade Upturn Aids Oil Market Rebalancing
Global trade is growing at the fastest rate for six years - which is both a symptom and a cause of the recovery in commodity markets.

Reuters

(John Kemp is a Reuters market analyst. The views expressed are his own)

LONDON, Sept 27 (Reuters) - Global trade is growing at the fastest rate for six years - which is both a symptom and a cause of the recovery in commodity markets.

World trade volumes were up almost 5 percent year-on-year from May to July, according to estimates compiled by government economic planners in the Netherlands.

Growth was four times faster than at the same point in 2016 (http://tmsnrt.rs/2y89NxC).

Global trade and commodity markets are linked in a circular causal relationship, which is one of the most important in the macroeconomy and a key source of fluctuations in the business cycle.

Commodities, from grains to minerals, metals and oil, are the largest item in global trade by tonnage, so the state of commodity markets has a major impact on world trade flows.

But trade volume is in turn a major driver of demand for fuels used in the engines on ships, trucks and railroads.

Most freight is moved by high-horsepower engines using residual fuel oil (ocean shipping) or distillate fuel oil (roads, railways, coastal and inland shipping).

The broad-based boom in commodity markets between 2010 and 2014 spurred an enormous increase in demand for freight-linked fuels.

Global trade volumes increased by an average of 3.7 percent per year between 2010 and 2014, according to the Netherlands Bureau for Economic Policy Analysis (“World Trade Monitor”, CPB, July 2017).

Global consumption of distillate fuel oil increased by almost 3 million barrels per day (bpd) over the same period (“Statistical Review of World Energy”, BP, 2017).

Consumption of freight-linked fuels grew much faster than demand for gasoline, which rose by just 1.7 million bpd.

But when commodity markets went into a tailspin in 2015 and 2016, trade volumes and freight-linked fuel demand were hit particularly hard.

Global trade was essentially flat between January 2015 and October 2016 in large part because of the slump in the commodity sector.


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