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 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) 15 Global financial collapse U.S. spare capacity exhausted Iran-Iraq War Low spare capacity 9-11 attacks Saudis abandon swing producer role Asian financial crisis 25 Iranian revolution Arab Oil Embargo Iraq invades Kuwait imported refiner acquisition cost of crude oil OPEC cuts targets 1.7 mmbpd WTI crude oil price OPEC cuts targets 4.2 mmbpd Sources: U.S. Energy Information Administration, Thomson Reuters 2

3 World oil prices move together due to arbitrage $/bbl (real 21 dollars, monthly average) WTI Brent Mars Tapis Dubai Sources: Bloomberg, Thomson Reuters 3

4 Crude oil prices are the primary driver of petroleum product prices Sources: EIA Short Term Energy Outlook, Thomson Reuters 4

5 Economic growth has a strong impact on oil consumption Sources: U.S. Energy Information Administration, IHS Global Insight 5

6 Changes in expectations of economic growth in can affect oil prices percent GDP growth in non-oecd countries (annual expectations) Jan '12 Jul '12 Jan '13 Jul '13 Jan '14 Jul '14 Jan '15 Jul '15 forecast year: 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 6

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

8 Rising oil prices held down global oil consumption growth from 25-28, despite high economic growth Sources: EIA Short Term Energy Outlook, Thomson Reuters 8

9 Changes in non-opec production can affect oil prices Sources: EIA Short Term Energy Outlook, Thomson Reuters 9

10 million barrels per day (annual expectations) Non-OPEC supply expectations indicate changes in market sentiment concerning oil supply Note: Starting in January of each year, each line shows the expected forecast of non-opec supply for the specified calendar year, which tends to move toward the actual realized supply outcome as the year progresses forecast year: Sources: EIA Short Term Energy Outlook 1

11 Changes in Saudi Arabia crude oil production can affect oil prices million barrels per day (year-on-year) percent change (year-on-year) Saudi Arabia crude oil production WTI percent change Sources: U.S. Energy Information Administration, Thomson Reuters 11

12 Unplanned supply disruptions tighten world oil markets and push prices higher million barrels per day Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Jul '13 Jan '14 Jul '14 Jan '15 Jul '15 OPEC supply disruptions non-opec supply disruptions Sources: U.S. Energy Information Administration 12

13 During 23-28, OPEC s spare production levels were low, limiting its ability to respond to demand and price increases Sources: EIA Short Term Energy Outlook, Thomson Reuters 13

14 The years experienced periods of very strong economic and oil demand growth, slow supply growth and tight spare capacity Sources: EIA Short Term Energy Outlook, Thomson Reuters 14

15 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) $/bbl change (year-on-year) OECD liquid fuels inventory WTI crude 12th - 1st futures price spread Sources: EIA Short Term Energy Outlook, Thomson Reuters 15

16 Open interest in crude oil futures grew over the last decade as more participants entered the market number of contracts (thousands) 2, 1,8 1,6 1,4 1,2 1, Source: Bloomberg 16

17 Physical participants (producers, merchants, processors, and end users) U.S. futures market contract positions number of contracts (thousands) producers/merchants long producers/merchants short producers/merchants net Source: CFTC Commitment of Traders 17

18 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 18

19 Crude oil plays a major role in commodity investment 215 Target Weights of the Bloomberg Commodity Index Lean Hogs: 1.9 % Live Cattle: 3.3 % Nickel: 2.1 % Zinc: 2.4 % Silver: 4.3 % Aluminum: 4.6 % Crude Oil: WTI: 7.8 % Crude Oil: Brent: 7.2 % Natural Gas: 8.7 % Copper: 7.5 % Heating Oil: 3.8 % Gasoline: 3.7 % Gold: 11.9 % Cotton: 1.5 % Coffee: 2.2 % Soy Meal: 2.7 % Soybean Oil: 2.8 % Sugar: 4. % Wheat: 4.5 % Soybeans: 5.7 % Corn: 7.2 % Source: Bloomberg 19

20 Commodity index investment flows have tended to move together with commodity prices percent change (year-on-year) Bloomberg Commodity Index assets under management (5 largest public U.S. commodity index funds) commodity index assets under management reported to CFTC under "special call" Source: Bloomberg, Commodity Futures Trading Commission (CFTC) 2

21 Correlations (+ or -) between daily price changes of crude oil futures and other commodities generally rose in recent years Date Natural Gas # # Gold # # # Copper # # # # Silver # # # Soy # # # # # # Corn # # # # # # # # Wheat # # # 1 # # # # # # # < to to to to.4.4 to.65 >.65 Negative correlation Positive correlation Note: Correlations computed quarterly 21

22 Correlations (+ or -) between daily returns on crude oil futures and financial investments have also strengthened Date S & P 5 # # # # # # # # # # # # U.S. Dollar # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # - # - # U.S. Bonds # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # - # # WTI Implied Volatility # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # -1 # -1 # # Inflation Expectations # # # < to to to to.4.4 to.65 >.65 Negative correlation Positive correlation Note: Correlations computed quarterly 22

23 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)

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