As we move well into 2017, the price of oil remains volatile as markets digest the impact of a new U.S. administration, production cuts by OPEC and the geopolitics of Brexit. Like any other year, the price of crude oil is being driven by a variety of factors: public policy, relative supply and demand by region, the interaction of crude and refined product prices, perceptions of oil market reality as well as that reality itself, and corporate, institutional and consumer behavior. Today, those factors are playing out in different ways around the globe; although they’re contributing to uncertainty, we’ve seen them put a firmer floor under the price of oil markets in recent months. Where the oil markets go from here remains to be seen, but there are a several variables to monitor, including:

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The idea of a more energy independent America

The energy industry is laser-focused on how U.S. President Trump’s vision to make America energy independent will play out over the next several years. So far, the plans discussed include: creating U.S. jobs through increased shale production, increasing the U.S. energy output through ramping up production of oil, natural gas and other energy resources, and, importantly, a less constrained attitude toward the exports of energy resources. The export policies have already had a positive impact on the U.S. balance of payments and the dollar. How these plans continue to evolve under the new administration will shape the crude and refined oil markets on an international scale.

Global interest rates

In the semi-annual Fed testimony on U.S. monetary policy earlier this year, Federal Reserve Chair Janet Yellen indicated an upbeat assessment of the U.S. economy. She noted that U.S. consumer spending continued to increase at a healthy pace supported by gains in household income and wealth, and that the U.S. labor market has experienced widespread gains in recent years. Yellen went on to reiterate that falling behind on inflation could negatively impact the U.S. economy. In addition to the Federal Reserve’s anticipated hike in March, all eyes will be on the Bank of England and European Central Bank as markets try to gauge the direction of European monetary policy. With diverging monetary policies across the US, Europe and Asia, there remains uncertainty in the oil market.

Strong U.S. dollar

As the U.S. Fed looks to increase rates in 2017, many commentators expect the strength of the dollar to remain an important factor. A strong dollar will generally restrain oil prices to some extent, and will impact oil production and trading differently depending on the currency of the producing region. Countries paying production costs in one currency and selling in dollar currency stand to benefit from a stronger dollar. ICE’s U.S. Dollar Index, the most widely followed indicator of performance for the U.S. dollar, had spiked up on Dec 15 following the Fed’s increase of interest rates and first change since 2012 in long-term rate guidance; from then, it consolidated at a higher level through early 2017 and appears to be awaiting more clarity around President Trump’s economic policies to support a stronger U.S. dollar.

Concerns around inflation

The perception of a potentially inflationary global environment, combined with current interest rate policies, is yielding a strong financial interest in oil. Driven by concerns that we may see a return of inflation, market participants are turning to commodities to provide inflationary protection. With index-protected or linked bonds forming a major part of sovereign issuance, one might think there was plenty of protection available to asset-liability institutions like insurance and pension funds, but the fall in real interest rates has dragged down yields for those index-linked sovereign bonds and pushed up prices to the extent that they are also somewhat tied to the overall yield curve. That makes oil instruments relatively attractive as an alternative hedge against inflation, as oil prices typically pick up rapidly and early in inflationary cycles.

The balancing act of supply and demand

While markets in the recent past have been characterized by a supply surplus, we’re currently seeing supply levels that are nearer to residual demand levels. The investment decisions made, which have curtailed production combined with the project cancellations that resulted from the oversupply of crude, have made an impact. We’re currently seeing producer optimism return to markets, which is driving a revival of oil rigs that have been shifted to new locations, the potential for more pipeline approvals in the U.S. and the potential for drilled-but-uncompleted (DUC) wells across U.S. shale fields to be put into production.

Global oil trading is increasing, both in terms of volume and in open interest. A 20-year chart of ICE Brent Crude futures, the global benchmark for oil prices, shows the contract hitting 20 consecutive years of volume records while continuously setting open interest records during the same time period. (Open interest is currently up to over 2.4 million open lots today.) Similarly, WTI, the benchmark for U.S. crude oil, has seen steadily increasing volumes and open interest for the last several years. It makes sense that we’re seeing both numbers rise simultaneously since they go hand-in-hand.

Together, higher volumes and open interest correlate to increased liquidity, greater confidence in the market and tighter spreads.

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New oil products

The breadth of tradable oil products has expanded to better meet the trading and risk management needs of market participants. There’s now a product to reflect every possible basis option across risk, geography and time. For example, in addition to ICE global benchmark futures contract on Brent, we now offer more than 400 related oil products that trade through ICE, including options, cracks, spreads and differentials. That product breadth has been deliberately engineered in response to a few factors: (1) the growing sophistication of trading strategies that require more flexibility, (2) an increased focus on cost efficiencies associated with clearing, prompting the expansion of cleared products, and (3) the need for greater access to the global oil markets.