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Monthly Oil Market Report


18 January 2018

Feature article:

Monetary policies and their impact on the oil market








Productmarketsand refineryoperations


Oil trade
















OPEC bulletin 2/18



Monetary policies and their

impact on the oil market

Central banks inmajor developedeconomies are expected

to implement some monetary tightening in 2018. This is

mainly due to the strong momentum in global economic

growth which is expected to continue this year, as well

as inflation expectations rising and the improving labour

market in these economies.

Higher crude prices have supported headline infla-

tion readings, although core inflation — which strips out

energy and food prices — has generally remainedmoder-

ate in developed economies. While inflation readings are

expected to remain moderate in 2018 in the three larg-

est developed economies, namely the US, the Euro-zone

and Japan, central banks expect some improvements next


Indeed, robust gains in labour markets have pushed

unemployment rates lower in 2017— in some cases close

to levels considered as full employment. This has only

translated in modest wage growth so far, indicating that

there is still some slack in the labour market, giving fur-

ther room for keeping monetary policy accommodative,

with a gradual approach towards normalization of mon-

etary policy going forward.

As a result, median expectation by participants at the

US Federal Reserve’s policy settingmeeting in December

viewed an additional increase of 75 basis points (bps) in

the target range of the Federal funds rate, the Feds key

policy rate, in 2018 as appropriate. This is unchanged

from their September estimations, in spite of expecta-

tions for a lower unemployment rate and faster economic

growth this year. Embedded in that forecast is the poten-

tial boost from the recently approved tax reform legis-

lation in the US, although significant uncertainty about

that impact was noted during the meeting.

The Fed noted that inflation risks appear to be

roughly balanced. Moreover, market-based measures

of inflation compensation in US dollar show a low —

though increasing — likelihood of above target inflation

in the medium- and long-term. Taking all this into ac-

count, the Fed has beenmoving forward cautiously. Last

year, a more moderate-than-previously expected pace

of monetary tighten-

ing in the US generally

translated into lower

US dollar, which pro-

vided some flexibility

for the central banks of

emerging economies.

Emerging economies

are particularly sen-

sitive to sudden

upward shifts in

interest rates ex-

pectations in the

US, which would

normally result in a tighter

monetary policy to limit large currency deprecia-

tions and capital outflows, which could curtail oil de-

mand growth in those economies.

Meanwhile, the likelihood for rate hikes in the Euro-

zone remains subdued, with no rate hike expected be-

fore the European Central Bank (ECB) ends net asset

purchases. However, recent ECB accounts showing some

potential change to communication guidance has been

interpreted as a shift towards a slightly less accommoda-

tive stance. This would likely result in some higher debt

securities yields not only in the Euro-zone but also in

other developed economies. Meanwhile, the head of the

Bank of Japan (BoJ) recently highlighted the possibility

that interest rates may be so low that they are unable to

stimulate the economy any more. While the BoJ is likely

to remain committed to monetary stimulus, but it could

slow the pace of its asset purchases.


affected by the expected monetary tightening in 2018.

Some increase in borrowing cost could be expected for

petroleum companies which have enjoyed historically

low borrowing costs in recent years. Therefore, the in-

creased tightening inmonetary policy is not likely to have

a considerable impact on the oil market, particularly in

an environment of improving economic growth.

M a r k e t R e v i e w