Global trade is growing at the fastest rate for six years - which is both a symptom and a cause of the recovery in commodity markets. World trade volumes were up almost 5 percent year-on-year from May to July, according to estimates compiled by government economic planners in the Netherlands. Global trade and commodity markets are linked in a circular causal relationship, which is one of the most important in the macroeconomy and a key source of fluctuations in the business cycle.
Commodities, from grains to minerals, metals and oil, are the largest item in global trade by tonnage, so the state of commodity markets has a major impact on world trade flows. But trade volume is in turn a major driver of demand for fuels used in the engines on ships, trucks and railroads.
Most freight is moved by high-horsepower engines using residual fuel oil (ocean shipping) or distillate fuel oil (roads, railways, coastal and inland shipping).
The broad-based boom in commodity markets between 2010 and 2014 spurred an enormous increase in demand for freight-linked fuels. Global trade volumes increased by an average of 3.7 percent per year between 2010 and 2014, according to the Netherlands Bureau for Economic Policy Analysis ("World Trade Monitor", CPB, July 2017).
Global consumption of distillate fuel oil increased by almost 3 million barrels per day (bpd) over the same period ("Statistical Review of World Energy", BP, 2017). Consumption of freight-linked fuels grew much faster than demand for gasoline, which rose by just 1.7 million bpd.
But when commodity markets went into a tailspin in 2015 and 2016, trade volumes and freight-linked fuel demand were hit particularly hard. Global trade was essentially flat between January 2015 and October 2016 in large part because of the slump in the commodity sector. Worldwide distillate consumption increased by less than 200,000 bpd between 2014 and 2016 compared with almost 750,000 bpd in the previous two-year period.
Since late 2016, however, commodity markets and trade flows have shown signs of recovery, which is now reflected in stronger demand for freight fuels. Consumption of low-sulphur distillate fuel oil in the United States is rising at the fastest rate in two years and record exports point to strong demand in Latin America as well as other markets.
Freight fuel demand is in turn encouraging refineries to process record crude volumes and whittling away excess crude stocks. Growing freight demand is helping to rebalance the oil market and lift prices, which should in turn raise incomes for many commodity-exporting countries and stimulate further freight growth and fuel demand in 2018.
After two years in which gasoline was the main driver of global oil demand in 2015/16, demand growth is rotating to distillate fuel oil, and that looks set to continue through 2018/19. The main risk to this outlook comes from the macroeconomic cycle, which is already looking mature in the United States and many other advanced economies.
The current business expansion in the United States is already the third-longest on record and will become the lengthiest if the economy is still expanding in July 2019.
The oil industry's own cyclical recovery, which is in its early stages, is now out of phase with the US business cycle, which looks increasingly mature. The misalignment between the US business cycle and the oil industry cycle will be a growing source of risk by 2019/2020.