Energy and Financial Markets Overview: Crude Oil Price Formation Richard Newell, Administrator Society of Petroleum Engineers, National Capital Section February 23, 2011 www.eia.gov
EIAs Energy and Financial Markets Initiative Collection of critical energy information to improve market transparency improved petroleum storage capacity data other improvements to data quality and coverage Analysis of energy and…
Synthesis of current perspectives on oil price formation 3 Richard Newell, February 23, 2011
Whos who in global oil markets Producers international oil companies (private) national oil companies (government-controlled) Consumers individuals (autos and space-heating) transportation fleets (trucking, shipping, air)…
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…
Crude oil prices react to a variety of economic and geopolitical events price per barrel (real 2009 dollars, quarterly average) 140 Global financial collapse Imported ref iner acquisition cost WTI crude oil 120 Iran-Iraq War 100…
World oil prices move together due to arbitrage price per barrel (real 2009 dollars, monthly average) 160 WTI crude oil 140 Brent crude oil MARS crude oil 120 Tapis crude oil 100 Dubai crude oil 80 60 40 20 0 2000 2001 2002…
Crude oil prices are the primary driver of petroleum product prices price per gallon (real 2009 dollars, monthly average) price per barrel (real 2009 dollars) 4.00 Forecast 160 Unplanned refinery 3.50 down-time 140 Post-hurricane 3.00…
Oil demand 10 Richard Newell, February 23, 2011
Oil demand and consumption: What matters Oil consumption is determined by demand drivers and price Demand is closely related to the state of the global economy oil is an input into industrial production and the transport of goods…
In non-OECD countries, economic growth has a strong impact on oil consumption percent change (year-on-year) 12 Forecast 10 8 6 4 2 0 -2 non-OECD oil consumption -4 non-OECD GDP 2001 2002 2003 2004 2005 2006 2007 2008 2009…
Economic growth in Asian economies surprised to the upside in 2007 and 2009 and to the downside in 2008 percent GDP growth in Asia-ex Japan (annual expectations) 10 9 8 7 6 2007 5 2008 4 Starting in January of each year, each…
In OECD countries, price increases have coincided with lower consumption percent change (year-on-year) price per barrel (real 2009 dollars) 6 135 Forecast 4 90 2 45 0 0 -2 -45 OECD consumption (left axis) -4 -90 WTI crude oil…
Rising oil prices held down global oil consumption growth from 2005-2008, despite high economic growth percent change (year-on-year) price per barrel (real 2009 dollars) 6 135 Forecast 5 4 90 3 2 45 1 0 0 -1 World oil consumption…
Oil supply 16 Richard Newell, February 23, 2011
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 -40 -3 OPEC…
Non-OPEC production saw strong growth in 2009-2010. EIA expects these increases to slow in 2011-2012 million barrels per day change (year-on-year) price per barrel (real 2009 dollars) 2.0 140 Forecast 1.5 105 1.0 70 0.5 35 0.0 0…
Non-OPEC supply expectations were adjusted upward in 2009-2010 after production decreases during downturn million barrels per day (annual average expectations) 52.0 2007 2008 2009 2010 2011 51.5 51.0 50.5 50.0 49.5 Starting in…
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…
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) 6 spare capacity < 2.5 million barrels…
Inventories: The balancing point 23 Richard Newell, February 23, 2011
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 -50 -5…
Financial market activity 25 Richard Newell, February 23, 2011
EIA is reviewing information that bears on several proposed linkages between physical and financial markets Our academic partners are looking at the growth of swap dealers, hedge funds, and commodity index funds in oil derivatives…
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 the…
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 1,000 800 600 400 200 0 2001…
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 commodities has strengthened over the past…
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. Treasury WTI crude oil price peak < -0.65…
Non-commercial participation in commodity derivative markets has been increasingly on the buy-side (net long) number of contracts (thousands) 200 Non-commercial net open interest 150 Commercial net open interest 100 50 0 -50…
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-…
Crude oil plays a major role in commodity investment 2011 Target Weights of the Dow Jones - UBS Commodity Index Nickel Live Cattle Lean Hogs Zinc 2.2% 3.4% 2.0% Crude Oil 2.8% 15% Silver 3.3% Aluminum 5.2% Natural Gas 12%…
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) 2.2 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 Assets under management…
Oil price formation: both physical and financial markets matter Supply and demand fundamentals remain a key underlying driver of oil prices the low near-term responsiveness of both oil consumption and production to price changes is an…
For more information U.S. Energy Information Administration home page www.eia.gov Short-Term Energy Outlook www.eia.gov/steo Annual Energy Outlook www.eia.gov/aeo International Energy Outlook www.eia.gov/ieo Monthly Energy Review…
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