Oil & Gas UK Activity Survey 2016

ACTIVITY SURVEY 2016

Oil prices are driven principally bymarket fundamentals of supply, demand and stocks but there remains a powerful interconnection with financial markets. The collapse in dollar oil prices since mid-2014 was accompanied by a rapid 20 per cent appreciation of the trade-weighted value of the US dollar and 15 per cent against sterling. For 2015 as a whole, the US dollar strengthened by 7.2 per cent against sterling to an average $/£ exchange rate of 1.53, compared to 1.65 in 2014. Any halt in the appreciation of the US dollar in 2016 can be expected to provide some support to dollar oil prices.

Figure 2: US Dollar to UK Sterling Spot Exchange Rate

1.80

1.70

1.60

1.50

1.40

US Dollar to UK Sterling Exchange Rate

1.3 0

2010

2011

2012

2013

2014

2015

2016

Source: Bank of England

In recent months, oil prices have been seen as a barometer of the state of the world economy and a source of additional deflationary risks. At the same time, the correlation between Brent prices and world equity markets increased sharply. As markets recognised the beneficial impact of lower prices to oil consumers and investors readjusted their expectations of central bank tightening, oil prices recovered slightly. At the time of writing, dated Brent is trading at around $30/bbl. Few commentators would be able to confidently predict its evolution over the rest of the year but the UK industry continues to recalibrate its price and revenue expectations to reflect the decline in forward Brent future prices (see Figure 3).

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