Download Oil Prices

Modeling Oil Markets
Janie M. Chermak, University of New Mexico
Robert H Patrick, Rutgers University
October 26, 2015
Literature
•
•
•
•
•
Medlock and Jaffe (2009) 2007-2008 speculation
Hamilton (2009) speculation, OPEC, scarcity rent
Dvir & Rogoff (2009) 1896-2008 price behavior
Kilian (2010) S&D shocks
Kellogg (2014) Impact of infill drilling on investment
Components
• Demand (consumption, additions to
storage)
• Supply (production, imports,
withdrawals from storage)
• Futures
Demand
(consumption, storage in)
Supply
(base production, new production,
storage out, imports)
Storage
Futures
(commercial and non-commercial traders)
Futures Market
Commercial (arbitrage) traders are those whose primary
businesses are exposed to oil price fluctuations and hedge
risks in futures markets to stabilize cash flows.
Non-commercial (speculative) traders speculate on crude
oil price movements.
Contango/Backwardation
If C4>C1, then DIFF>0 – Contango
If C4<C1, DIFF<0 - Backwardation
Market(s)
Demand for Crude Oil
æ spot price,economic conditions,ö
Crude oil demand = f ç
÷ø
è inventory, shocks / events,...
Inverse Supply of Crude Oil
æ crude oil supply, futures prices, stock, ö
Spot price = g ç
è economic conditions, shocks / events,...÷ø
Futures Price
Futures price = h ( spot price, speculation,inventory, shocks / events )
Data from EIA, Baker Hughes: Weekly 1/1/1986 – 10/1/2015
Model (ARCH/GARCH- in means)
• Equation 1: Quantity Demanded is a function of:
–
–
–
–
–
–
WTI Spot Price [ -/- ] *
Prime Rate [+/+] *
+ Change in Storage [ +/-]
S&P [+/+] *
Time [+/+] *
Binaries:
• Recession [-/-] *, 9/11[-/+] *
– Variance Terms
• Recession (-/-)*; 9/11 (+/+)*
* Significant at 5% or greater
MODEL (ARCH GARCH - in means)
• Equation 2: WTI Spot Price is a function of:
–
–
–
–
–
–
Futures Price (+/+)*
Oil Rig Count (+/+)*
Production (+/+)*
Change in Storage (-/-)*
Contango/Backwardation (+/-)*
Open Interest
• NC Short (+/+)*; NC Long (-/-)*: NC Spread (+/+)*;
CS Short (+/+)*; CL (-/-)*
– Variance Terms
• CFMA (+/+)*; 9/11 (+/+)*
* Significant at 5% or greater
MODEL (ARCH GARCH - in means)
• Equation 3: Futures Price is a function of:
– Open Interest (+/+)*
– CFMA (+/+)*
– S&P (+/+)*
– Gold (-/+)*
– Days of Storage (-/+)
– Time (?/-)*
– Variance Terms:
• 9/11 (+/+)*
* Significant at 5% or greater
Conclusions
Market Fundamentals are Significant
Storage Is Significant
Shocks Are Significant
Financial Markets and Rules are Significant
Significance of Relative Impacts Changes Over Time
Thank You
jchermak@unm.edu
rhpatrick@rutgers.edu
The Crude Oil Consumer’s Objective
max p = pz (t) f k (K k (t), Lk (t),qk (t)) - r(t)K k - w(t)Lk (t) - P(t)qk (t)
K ,L,q
Individual Demand for Crude
(
)
qk (t) = f w(t),r(t), P(t), p z (t);W k ,
Individual Demand for Crude
K
F(t) = å qk (t).
k=1
The Producer’s Objective:
Individual Producer’s Supply:
qi (t) = f (EPi (t),ri (t), mi (t),d i (t), Ri (t); bi ),
Aggregate Supply:
I
Y(t) = å qi (t).
i=1
Equilibrium without Storage or Futures
(
P(t) = f F(w(t),r(t),p z (t);W),Y(r(t), m (t),EP(t),d(t),R(t);b)
)
Storage
ì > e-h j (t+t ) ENP (t + t ) then s (t) < 0
j
j
ï
ï
- h j (t+t )
If Pt í = e
ENPj (t + t ) then s j (t) = 0
ï
- h j (t+t )
ENPj (t + t ) then s j (t) > 0
ï <e
î
(
s j (t) = f s j (t -1),rj (t),rj (t + 1),...,rj (t + t ),ENPj (t + t )
S(t) = å s j (t)
)