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ACTIVITY SURVEY
2016
page 12
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
1.3
0
1.40
1.50
1.60
1.70
1.80
2010
2011
2012
2013
2014
2015
2016
US Dollar to UK Sterling Exchange Rate
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).