What drives crude oil prices?

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1 What drives crude oil prices? An analysis of 7 factors that influence oil markets, with chart data updated monthly and quarterly January 8, 214 Washington, DC U.S. Energy Information Administration Independent Statistics & Analysis

2 Crude oil prices react to a variety of geopolitical and economic events price per barrel (real 21 dollars, quarterly average) imported refiner acquisition cost of crude oil WTI crude oil price Global financial collapse 1 Iran-Iraq War Low spare capacity 8 U.S. spare 6 capacity exhausted 4 2 Iranian revolution Saudis abandon swing producer role 9-11 attacks Asian financial crisis OPEC cuts targets 4.2 mmbpd OPEC cuts targets Arab Oil Embargo Iraq invades Kuwait 1.7 mmbpd Sources: U.S. Energy Information Administration, Thomson Reuters January 8, 214 2

3 World oil prices move together due to arbitrage dollars per barrel real 21 dollars, monthly average WTI crude oil Brent crude oil Dubai crude oil Tapis crude oil Mars crude oil Sources: Bloomberg, Thomson Reuters January 8, 214 3

4 Crude oil prices are the primary driver of petroleum product prices price per gallon real 21 dollars, monthly average 5. Hurricane Katrina shuts down refineries & pipelines 4. Post-hurricane refinery repairs Unplanned refinery down-time price per barrel real 21 dollars, monthly average Forecast U.S. retail price of regular gasoline (left axis) imported acquisition cost of crude oil (right axis) Sources: EIA Short Term Energy Outlook, Thomson Reuters January 8, 214 4

5 Economic growth has a strong impact on oil consumption percent change (year-on-year) non-oecd liquid fuels consumption non-oecd GDP Forecast Sources: EIA Short Term Energy Outlook, Thomson Reuters January 8, 214 5

6 Changes in expectations of economic growth can affect oil prices percent GDP growth in Asia, excluding Japan (annual expectations) Note: Starting in January of each year, each line shows the expected forecast of GDP growth for the specified calendar year, which tends to move toward the actual realized growth outcome as the year progresses. Expectations continue to evolve into the next calendar year as revised GDP data become available (e.g., 28 GDP expectations are revised even during 29). Source: IHS Global Insight January 8, 214 6

7 In OECD countries, price increases have coincided with lower consumption percent change (year-on-year) 6 4 price per barrel (real 21 dollars) 135 Forecast OECD liquid fuels consumption (left axis) WTI crude oil price (right axis) Sources: EIA Short Term Energy Outlook, Thomson Reuters -135 January 8, 214 7

8 Rising oil prices held down global oil consumption growth from 25-28, despite high economic growth percent change (year-on-year) price per barrel (real 21 dollars) Forecast World liquid fuels consumption (left axis) World GDP WTI crude oil price (right axis) Sources: EIA Short Term Energy Outlook, Thomson Reuters January 8, 214 8

9 EIA expects strong growth in non-opec production in 214 and 215 million barrels per day change (year-on-year) price per barrel (real 21 dollars) Forecast non-opec liquid fuels production (left axis) WTI crude oil price (right axis) Sources: EIA Short Term Energy Outlook, Thomson Reuters January 8, 214 9

10 Non-OPEC supply expectations were adjusted upward in 21 after production decreased during downturn million barrels per day annual average expectations Note: Starting in January of each year, each line shows the expected forecast of non-opec supply growth for the specified calendar year, which tends to move toward the actual realized growth outcome as the year progresses Sources: EIA Short Term Energy Outlook January 8, 214 1

11 OPEC production often acts to balance the oil market. Cuts in OPEC production targets tend to lead to price increases. million barrels per day change (year-on-year) percent change (year-on-year) OPEC production targets (left axis) -4 WTI crude oil price (right axis) Sources: U.S. Energy Information Administration, Thomson Reuters January 8,

12 During 23-28, OPEC s spare production levels were low, limiting its ability to respond to demand and price increases spare capacity (million barrels per day) price per barrel (real 21 dollars) 7 6 spare capacity < 2.5 million barrels per day OPEC spare capacity (left axis) WTI crude oil price (right axis) Forecast Sources: EIA Short Term Energy Outlook, Thomson Reuters January 8,

13 The years experienced periods of very strong economic and oil demand growth, slow supply growth and tight spare capacity percent change (year-on-year) 6 4 spare capacity < 2.5 million barrels per day price per barrel (real 21 dollars) 135 Forecast World liquid fuels production capacity* (left axis) World GDP (left axis) WTI crude oil price (right axis) Sources: EIA Short Term Energy Outlook, Thomson Reuters January 8,

14 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) OECD liquid fuels inventory (left axis) WTI crude 12th-1st futures price spread (right axis) Sources: EIA Short Term Energy Outlook, Thomson Reuters January 8,

15 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 number of contracts (thousands) Source: Bloomberg January 8,

16 Physical participants (producers, merchants, processors, and end users) have moved from net short to net long in the U.S. futures market number of contracts (thousands) 5 producers/merchants long 4 producers/merchants short producers/merchants net Source: CFTC Commitment of Traders January 8,

17 Money managers tend to be net long in the U.S. oil futures market number of contracts (thousands) money managers long money managers short money managers net Source: CFTC Commitment of Traders January 8,

18 Crude oil plays a major role in commodity investment 214 Target Weights of the Dow Jones - UBS Commodity Index Silver 4% Zinc 2% Nickel 2% Live Cattle 3% Lean Hogs 2% Crude Oil: WTI 8% Crude Oil: Brent 7% Aluminum 5% Copper 8% Natural Gas 9% Heating Oil 4% Gold 12% Gasoline 4% Coffee 2% Cotton 2% Soy Meal 3% Soybean Oil 3% Sugar 4% Soybeans 6% Wheat 5% Corn 7% Source: Dow Jones Indexes, CME Group January 8,

19 Commodity index investment flows have tended to move together with commodity prices percent changes (year-on-year) 2 15 Dow Jones UBS commodity price index Assets under management (five largest public U.S. commodity mutual funds) Commodity index investment reported to CFTC under "special call" Source: CFTC Special Call Report January 8,

20 Correlations (+ or -) between daily price changes of crude oil futures and other commodities generally rose in recent years Energy Natural Gas Gold Metals Copper Silver Soybeans Agriculture Corn Wheat WTI crude oil price peak < to to to to.4.4 to.65 >.65 Negative correlation Positive correlation Note: Correlations computed quarterly January 8, 214 2

21 Correlations (+ or -) between daily returns on crude oil futures and financial investments have also strengthened S&P 5 U.S. Dollar U.S. Treasury Bonds WTI Implied Volatility Inflation Expectations WTI crude oil price peak < to to to to.4.4 to.65 >.65 Negative correlation Positive correlation Note: Correlations computed quarterly January 8,

22 For more information U.S. Energy Information Administration home page Short-Term Energy Outlook Annual Energy Outlook International Energy Outlook Monthly Energy Review EIA Information Center (22) January 8,

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