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OPEC: The Fed's next move will impact oil markets

he Wilmington ARCO refinery is seen before dawn on December 19, 2003 in Los Angeles, California.
David McNew/Getty Images

Central banks such as the U.S. Federal Reserve will be crucial in determining the state of global growth and the overall health of the energy sector, according to the latest monthly report from oil producer group OPEC.

In its latest September report, the 14-member oil producing cartel said that the trend of "moderate" global growth was likely to continue in 2016 and 2017 and that imminent central bank decisions and political developments were likely "to be influential."

"There are several key dynamics across the globe that are significant (to global growth) in the short-term, OPEC said on Monday before commenting on the effectiveness of central bank stimulus programs.

"Interest rates are already low in major economies and the effectiveness of further monetary stimulus has diminished, despite remaining crucial for some economies. Here, any decision from main central banks on monetary policies, particularly the U.S. Fed, will continue to be influential. Moreover, in most key economies the space for fiscal stimulus seems to be limited given high debt levels." it said.

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The comments come as international financial markets decline on concerns that the Fed is about to raise interest rates when it meets on September 21-22. If it does increase interest rates, the dollar would be bound to strengthen, making oil trades (which is settled in dollars) more expensive for buyers holding other currencies.

That could in turn hamper global demand and consumption at a time when major oil producers, such as OPEC, the U.S. and Russia, are desperate for demand to keep pace with supply.

Growth bashing

OPEC said that that the trend of moderating global growth was likely to continue this year but that the energy sector, despite being harmed by lower investment as a result, could help buoy global growth.

"There are several key dynamics across the globe that are significant (to global growth prospects) in the short-term," OPEC noted. "There is a considerable negative impact on global growth from the energy sector due to the sharp decline in investments, mainly in the oil and gas sector as well as lower output values."

"So far this has not been entirely compensated by positive effects from consumption. Any stabilization in the crude oil market in coming months could provide positive support to overall economic activity," OPEC said.

Despite the moderate global growth levels, OPEC remained confident on oil demand growth and stuck to its prediction that oil markets are continuing to rebalance. "Despite moderate global economic growth, recent data shows better-than-expected oil demand in some of the main consuming countries. This, along with a potentially improving oil supply picture, would contribute to a reduction in the imbalance of market fundamentals in the coming months."

The group warned there was limited scope for governments to stimulate growth. "In most key economies the space for fiscal stimulus seems to be limited given high debt levels. Finally, political developments are becoming increasingly relevant – ranging from elections in several countries to fiscal policy decisions, as well as the implementation and possible impact of Brexit (the U.K.'s decision to leave the EU)."

Number crunching

Despite the backdrop of political and economic uncertainty, OPEC said that it anticipated world oil demand growth in 2016 to increase by 1.23 million barrels a day (mb/d) after a marginal upward revision, mainly to reflect better-than-expected economic data for the first half of the year. Oil demand in 2016 is expected to average 94.27 mb/d, it added.

In 2017, OPEC forecast that world oil demand is anticipated to rise by 1.15 mb/d, unchanged from OPEC's previous report, to average 95.42 mb/d. The main growth centers for next year continue to be India, China and the U.S., it said.

Demand for OPEC crude in 2016 is estimated to stand at 31.7 mb/d, some 1.7 million barrels a day over last year, the oil producer group said. In 2017, meanwhile, demand for OPEC crude is forecast at 32.5 mb/d, an increase of 0.8 mb/d over the current year.

In terms of supply, OPEC noted that non-OPEC supply in 2016 was expected to contract by 610,000 barrels a day following an upward revision from last month's report, to average 56.32 mb/d. "This has been mainly due to a lower-than-expected decline in U.S. tight oil and a better-than expected performance in Norway, as well as the early start-up of Kashagan field in Kazakhstan," it said.