Energy and Financial Markets Initiative: Update on Work Related to Oil Markets November 18 18, 2010 Richard Newell, Administrator
Overview EIAs Energy and Financial Markets Initiative Improving information on petroleum storage capacity Synthesis of our current perspective on oil price formation Richard Newell, November 18, 2010 2
EIAs Energy and Financial Markets Initiative Collection of critical energy information to improve market transparency p y improved petroleum storage capacity data other improvements to data quality and coverage Analysis of energy…
Improving information on petroleum storage capacity Richard Newell, November 18, 2010 4
EIA will soon (Dec. 1, 2010) start publishing much-improved data on petroleum products storage capacity Analysis of inventory levels in the context of storage capacity p y is important p for understanding gppetroleum market…
Storage capacity data: the details matter Like all EIA data collections, the storage capacity program pays p y careful attention to details report working storage capacity in operation (excluding idle capacity) and net available…
Petroleum storage capacity tank diagrams GROUND UNAVAILABLE LEVEL SPACE CAPACITY CRUDE OIL OR RAGE CONTINGENCY SPACE LIQUID WORKING STOR AILABLE SHELL C BRINE STRING G PRODUCT HELL CAPACITY…
Storage capacity utilization rates will be more transparent It will be possible to calculate approximate storage capacity utilization rates at refineries and p petroleum p products terminals using the new data EIA also plans to…
Synthesis of current perspectives on oil price formation Richard Newell, November 18, 2010 9
Whos who in global oil markets Producers international oil companies (private) national oil companies (government (government-controlled) controlled) Consumers individuals (autos and space-heating) transportation fleets…
Many factors influence the formation of oil prices and other energy prices Supply Physical balancing Demand Affected by current Inventories Affected by current conditions and future conditions and future expectations for: Markets &…
EIA is actively examining the role of both supply-demand fundamentals and other factors in oil price formation EIA has asked several academic partners to conduct thorough reviews of economic literature regarding supply-demand…
Recent history of oil prices Richard Newell, November 18, 2010 13
Crude oil prices react to a variety of economic and geopolitical events price per barrel (real 2009 dollars) 140 Global financial collapse Imported refiner acquisition cost WTI crude oil 120 Iran-Iraq War 100 Low spare p…
World oil prices move together due to arbitrage price per barrel (real 2009 dollars) 160 WTI crude oil 140 Brent crude oil MARS crude oil 120 Tapis crude oil 100 Dubai crude oil 80 60 40 20 0 2001 2002 2003 2004…
Crude oil prices are the primary driver of petroleum product prices price per gallon (real 2009 dollars) price per barrel (real 2009 dollars) 4.00 gasoline wholesale ((left axis)) g Unplanned refinery 160 down-time 3.50 diesel…
Oil demand Richard Newell, November 18, 2010 17
Oil demand and consumption: What matters Oil consumption is determined by demand drivers and price D Demandd iis closely l l related l t d tto th the state t t off th the global l b l economy oil is an input into industrial…
In non-OECD countries, strong economic growth drove oil consumption higher during 2004-2008 percent change (year-on-year) 12 non-OECD OECD consumption ti 10 non-OECD GDP 8 6 4 2 0 -2 -4 2001 2002 2003 2004…
Economic growth in fast-growing Asian economies surprised to the upside, until the economic slowdown of 2008 percent GDP growth in Asia-ex Japan (annual expectations) 9 8 7 6 5 2006 2007 2008 4 Starting in January of…
In OECD countries, price increases held consumption down from 2005 to 2008 percent change (year-on-year) price per barrel (real 2009 dollars) 6 135 4 90 2 45 0 0 -2 -45 OECD consumption p ((left axis)) -4 -90 WTI…
Rising oil prices held down global oil consumption growth from 2005 on, despite high economic growth percent change (year-on-year) price per barrel (real 2009 dollars) 6 135 5 4 90 3 2 45 1 0 0 -1 World oil consumption…
Oil supply Richard Newell, November 18, 2010 23
Oil supply and production: What matters OPEC actively sets production quotas for members (compliance varies) can influence prices with announced price targets and quotas maintenance of spare capacity by Saudi Arabia gives it the…
OPEC production often acts to balance the oil market; OPEC quota cuts tend to lead to price increases million barrels per day change (year-on-year) percent change (year-on-year) 5 100 4 80 3 60 2 40 1 20 0 0 -1 -20 -2…
Non-OPEC production saw almost no net increase from 2005 to 2008. Demand increases had to be met by OPEC, or held down by prices million barrels per day change (year-on-year) price per barrel (real 2009 dollars) 2.0 140 1.5…
Non-OPEC supply expectations were adjusted downward after disappointing production million barrels per day (annual average expectations) 53.0 2005 2006 2007 2008 52.5 52 0 52.0 51.5 51.0 Starting in January of each…
During 2003-2008, OPECs spare production levels were low, limiting its ability to respond to demand and price increases spare capacity (million barrels) price per barrel (real 2009 dollars) 7 140 spare capacity < 2.5 million barrels 6…
In summary, 2003-2008 saw periods of very strong economic and oil demand growth, slow supply growth and tight spare capacity percent change (year-on-year) price per barrel (real 2009 dollars) spare capacity < 2.5 million barrels 6…
Inventories: The balancing point Richard Newell, November 18, 2010 30
Inventory builds go hand-in-hand with increases in future oil prices relative to current prices (and vice versa) million barrels change (year-on-year) dollars per barrel change (year-on-year) 200 20 150 15 100 10 50 5 0 0…
Financial market activity Richard Newell, November 18, 2010 32
EIA is reviewing information that bears on several proposed linkages between physical and financial markets Our academic partners are looking at the increase in oil derivatives trading and a significant change in the composition of…
Commodity derivatives have multiple roles in the market Successful futures and derivatives markets can help improve market efficiency provide transparent price discovery tools for managing and hedging price risk serve as a vehicle…
The attraction of commodity diversification brought increased institutional investment during the oil price rise Crude oil and other commodities were an attractive investment expectations for crude oil demand were high in 2007 and…
Open interest in crude oil futures grew over the last decade as more participants entered the market average daily open interest in crude oil futures (thousands of contracts) 1,600 1,400 1,200 1,000 800 600 400…
Daily return correlations between oil prices and other asset classes have generally strengthened in recent years The correlation between daily returns on crude oil and other globally-traded g y commodities has strengthened g over…
Correlations between daily price changes of crude oil and other commodities generally rose in recent years 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Energy Natural gas Gold Metals Copper Silver Soybeans…
Correlations (+ or -) between daily returns on crude oil and financial investments have also strengthened 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 S&P 500 U S dollar U.S. dollar* U.S. bonds** WTI crude oil price…
Non-commercial participation in commodity derivative markets has been increasingly on the buy-side (net long) number of contracts (thousands) 150 Non-commercial Non commercial net open interest Commercial net open interest 100…
Did the level of commodity index investment move with or counter to movement in oil prices More evidence is needed CFTC special call data on commodity investment is an important source of information, but it is only available post- D…
Crude oil plays a major role in commodity investment 2010 target weights of the Dow Jones-UBS Commodity Index Live cattle Lean hogs Nickel 3.6% 2.1% 2 2.4% 4% Crude oil Zinc 15% 3.0% Silver 3.3% Aluminum 5.7% Natural gas…
Index investors' CFTC futures-equivalent positions may have actually run counter to movements in oil prices index investor future-equivalent positions (thousands of contracts) price per barrel (real 2009 dollars) from the end of 2007…
Assets under management by largest U.S. commodity funds compared to CFTCs total index notional investment asset value ratios relative to December 2007 (normalized dollars) 1.6 1.4 1.2 1 0.8 0.6 0.4 Assets under…
Oil price formation: both physical and financial markets matter Supply and demand fundamentals remain a key underlying driver of oil prices p the low near-term responsiveness of both oil consumption and production to price changes…
For more information U.S. Energy Information Administration home page www.eia.gov Short-Term Energy Outlook www.eia.gov/emeu/steo/pub/contents.html Annual Energy Outlook www eia gov/oiaf/aeo/index html…
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