Oil prices and US$: do not expect the usual linkage

THE April 18 failure of Opec (Organization of the Petroleum Exporting Countries) and non-Opec countries to reach a deal in Doha on a freeze or a decline in oil production quotas led to an immediate sell-off in the oil market, which quickly reverted towards a confirmation of the earlier trend change seen in February 2016. As a matter of fact, the mere occurrence of such a meeting attended by Russia as well as all Opec members to discuss oil supply control is of far more (medium-term) significance than the inability to reach a deal at "first sight".

In terms of actual supply and demand, US output is starting to effectively contract on a year-on-year basis, and other non-Opec production also declines or stabilises. Over the very short run, the recent fires in Alberta are likely to subtract a significant amount from Canada's oil output.

Even the past increase in Opec production (read: Saudi Arabia, Iraq, Iran) is now heading south. US and non-Opec production is moving into larger contraction, and total supply is thus going towards an overall year-on-year decline over the next few months. On the demand side, we note that a very mild winter has dampened demand in OECD (Organisation for Economic Co-operation and Development) countries in the early months of 2016, but we do not expect the y-o-y decline to continue; with China and most emerging markets (EMs) stabilising, this would translate into a 1-1.5 million barrels/day y-o-y increase. The rebalancing is therefore taking place.