Eia What Drives Crude Oil Prices

What drives crude oil prices?
An analysis of 7 factors that influence oil markets,

with chart data updated monthly and quarterly
July 12, 2016 | Washington, DC
U.S. Energy Information Administration
Independent Statistics & Analysis
www.eia.gov
Crude oil prices react to a variety of geopolitical and economic

events
price per barrel (real 2010 dollars)
150
Global financial collapse
125
Iran-Iraq War
100
75
U.S. spare
capacity
exhausted
Low spare
capacity
9-11 attacks
Saudis abandon
swing producer role
Asian financial crisis
50
25
OPEC cuts targets

4.2 mmbpd
Iranian
revolution
Arab Oil Embargo
0
1970
1975
1980
OPEC cuts targets

1.7 mmbpd
Iraq invades Kuwait
1985
1990
1995
imported refiner acquisition cost of crude oil
2000
2005
2010
2015
WTI crude oil price
Sources: U.S. Energy Information Administration, Thomson Reuters
July 12, 2016
World oil prices move together due to arbitrage

$/bbl (real 2010 dollars, monthly average)
160
140
120
100
80
60
40
20
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
WTI
Brent
Mars
Tapis
Dubai
Sources: Bloomberg, Thomson Reuters
July 12, 2016
Crude oil prices are the primary driver of petroleum product

prices
Sources: EIA Short Term Energy Outlook, Thomson Reuters
July 12, 2016
Economic growth has a strong impact on oil consumption
Sources: U.S. Energy Information Administration, IHS Global Insight
July 12, 2016
Changes in expectations of economic growth in can affect oil

prices
percent GDP growth in non-OECD countries (annual expectations)
8
0
2012
2013
forecast year:
2014
2013
2014
2015
2015
2016
2016
2017
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., 2008 GDP expectations are revised even during 2009).
Source: IHS Global Insight
July 12, 2016
In OECD countries, price increases have coincided with lower

consumption
July 12, 2016
Rising oil prices held down global oil consumption growth from
2005-2008, despite high economic growth
July 12, 2016
Changes in non-OPEC production can affect oil prices
July 12, 2016
Non-OPEC supply expectations indicate changes in market

sentiment concerning oil supply
million barrels per day (annual expectations)
59.0
58.5
58.0
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
57.5
outcome as the year progresses.
57.0
56.5
56.0
55.5
55.0
54.5
54.0
53.5
53.0
52.5
2012
2013
forecast year:
2014
2013
2014
2015
2015
2016
2016
2017
Sources: EIA Short Term Energy Outlook
July 12, 2016
10
Changes in Saudi Arabia crude oil production can affect oil

prices
million barrels per day (year-on-year)
percent change (year-on-year)
2.5
100
80
1.5
60
40
0.5
20
-0.5
-20
-1
-40
-1.5
-60
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Saudi Arabia crude oil production
WTI percent change
Sources: U.S. Energy Information Administration, Thomson Reuters
July 12, 2016
11
Unplanned supply disruptions tighten world oil markets and

push prices higher
million barrels per day
4
0
Jan '11
Jul '11
Jan '12
Jul '12
Jan '13
Jul '13
OPEC supply disruptions
Jan '14
Jul '14
Jan '15
Jul '15
Jan '16
Jul '16
non-OPEC supply disruptions
Sources: U.S. Energy Information Administration
July 12, 2016
12
During 2003-2008, OPECs spare production levels were low,

limiting its ability to respond to demand and price increases
July 12, 2016
13
The years 2003-2008 experienced periods of very strong economic and oil
demand growth, slow supply growth and tight spare capacity
July 12, 2016
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)
$/bbl change (year-on-year)
350
35
300
30
250
25
200
20
150
15
100
10
50
-50
-5
-100
-10
-150
-15
-200
-20
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
OECD liquid fuels inventory
WTI crude 12th - 1st futures price spread
July 12, 2016
15
Open interest in crude oil futures grew over the last decade as
more participants entered the market
number of contracts (thousands)
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Bloomberg
July 12, 2016
16
Physical participants (producers, merchants, processors, and end users) U.S.

futures market contract positions
500
400
300
200
100
0
-100
-200
-300
-400
-500
-600
2008
2009
2010
producers/merchants long
2011
2012
2013
producers/merchants short
2014
2015
2016
producers/merchants net
Source: CFTC Commitment of Traders
July 12, 2016
17
Money managers tend to be net long in the U.S. oil futures

market
400
350
300
250
200
150
100
50
0
-50
-100
-150
-200
-250
2008
2009
2010
money managers long
2011
2012
2013
money managers short
2014
2015
2016
money managers net
Source: CFTC Commitment of Traders
July 12, 2016
18
Crude oil plays a major role in commodity investment

2015 Target Weights of the Bloomberg Commodity Index
Lean Hogs: 1.9 %
Crude Oil: WTI: 7.8 %
Live Cattle: 3.3 %

Nickel: 2.1 %
Crude Oil: Brent: 7.2 %
Zinc: 2.4 %
Silver: 4.3 %
Aluminum: 4.6 %
Natural Gas: 8.7 %
Copper: 7.5 %
Heating Oil: 3.8 %
Gasoline: 3.7 %
Gold: 11.9 %
Cotton: 1.5 %
Corn: 7.2 %
Coffee: 2.2 %
Soy Meal: 2.7 %
Soybeans: 5.7 %
Soybean Oil: 2.8 %

Sugar: 4.0 %
Wheat: 4.5 %
Source: Bloomberg
July 12, 2016
19
Commodity index investment flows have tended to move

together with commodity prices
percent change (year-on-year)
200
150
100
50
0
-50
-100
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Bloomberg L.P. Commodity Index

assets under management (5 largest public U.S. commodity index funds)
commodity index assets under management reported to CFTC under "special call" *
* Note: CFTC discontinued the collection of index investment data in November 2015.
Source: Bloomberg, Commodity Futures Trading Commission (CFTC)
July 12, 2016
20
Correlations (+ or -) between daily price changes of crude oil

futures and other commodities generally rose in recent years
Date
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Natural Gas 0 0 0 1 0 1 0 0 0 1 1 1 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 # 0 0 0 0 0 0 0 0 0 0 # 0 0 0
2015
2016
000 0 0 0 0
0 0# 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 1 1 1 0 0 0 0 1 0 1# 0 1 1 1 0 1 0 0 0 0 0 0 0 0#
0 0
Copper
# 0# 0 0 0 0 0# 0 0# 0 1 0 0 0 0 0 0 1 0 1 1 0 1 1 1 1 1 0 1 0 1 1 1 1 1 1 0 0 1 0 0 0
0 100 0 0 1 0
Silver
0 0# 0 0 0 0# 0 0 0 0 0 1 0 0 0 0 0 1 1 1 0 0 0 0 1 1 1 0 0 0 0 1 0 1 0 0 0 0 0 0 0 0#
0 000 0 0 0 0
Soy
# 0# 0# 0# 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 1 1 0 1 0 0 0 0 0 0 0 0 1 0 0 0 0 0# 0 0# 0
000 0 0 0 0
Corn
# 0## 0 0 0# 0 0 0 0 0 0 0 0 0# 0 0 1 0 0 1 1 0 0 1 0 0# 0 0 0 0 0 0 0 0 0# 0# 0 0
000 0 0#0
Wheat
0 0# 0 0 0 0# 0 0 0 0# 0 0 0 1## 0 0 0 0 0 1 1 0 1 0 0 0 0 0 0 0 0 0 0 0##### 0
Gold
0 0 0#
00 0 0#0
< -0.65
-0.65 to -0.4 -0.4 to -0.25 -0.25 to 0.25 0.25 to 0.4 0.4 to 0.65
> 0.65
Negative correlation
Positive correlation
Note: Correlations computed quarterly
July 12, 2016
21
Correlations (+ or -) between daily returns on crude oil futures

and financial investments have also strengthened
Date
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
S & P 500
#### 0 0### 0# 0 0 0# 0 0 0 0# 0# 0 0 0 1 1 0 1 1 1 1# 1 1 1 0 1 1 0 0 1 0 0 0 0 0 0 0 0 0 0 1 0
U.S. Dollar
############### 0## 0####################### 0# # # #
# 0
U.S. Bonds
0 0 0 0# 0 0 0# 0 0# 0 0### 0# 0# 0##################### 0 # # 0
## ##
WTI Implied Volatility 0 # # 0 # 0 0 # 0 0 0 # 0 # 0 # # # # 0 0 0 # # # # # # # # # # 0 # # # # # # # # # 0 # # 0 #
## ##
0#
Inflation Expectations 0 0 0 # 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 1 0 1 # 0 0 0 0 0 1 0 0 0 1 1 0 0 1 0 0 # 1 0 0 0 0 0 0 0 1 1 0 1 1
< -0.65
-0.65 to -0.4 -0.4 to -0.25 -0.25 to 0.25 0.25 to 0.4 0.4 to 0.65
> 0.65
Negative correlation
Positive correlation
Note: Correlations computed quarterly
July 12, 2016
22
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 | www.eia.gov/mer
EIA Information Center

(202) 586-8800 | email: [email protected]
July 12, 2016
23

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What drives crude oil prices?

An analysis of 7 factors that influence oil markets,

July 12, 2016 | Washington, DC

U.S. Energy Information Administration

Independent Statistics & Analysis

Crude oil prices react to a variety of geopolitical and economic

OPEC cuts targets

OPEC cuts targets

Iraq invades Kuwait

imported refiner acquisition cost of crude oil

WTI crude oil price

Sources: U.S. Energy Information Administration, Thomson Reuters

July 12, 2016

World oil prices move together due to arbitrage

Sources: Bloomberg, Thomson Reuters

July 12, 2016

Crude oil prices are the primary driver of petroleum product

Sources: EIA Short Term Energy Outlook, Thomson Reuters

July 12, 2016

Economic growth has a strong impact on oil consumption

Sources: U.S. Energy Information Administration, IHS Global Insight

July 12, 2016

Changes in expectations of economic growth in can affect oil

Source: IHS Global Insight

July 12, 2016

In OECD countries, price increases have coincided with lower

Sources: EIA Short Term Energy Outlook, Thomson Reuters

July 12, 2016

Sources: EIA Short Term Energy Outlook, Thomson Reuters

July 12, 2016

Changes in non-OPEC production can affect oil prices

Sources: EIA Short Term Energy Outlook, Thomson Reuters

July 12, 2016

Non-OPEC supply expectations indicate changes in market

Note: Starting in January of each year, each line shows the

outcome as the year progresses.

Sources: EIA Short Term Energy Outlook

July 12, 2016

Changes in Saudi Arabia crude oil production can affect oil

percent change (year-on-year)

Saudi Arabia crude oil production

WTI percent change

Sources: U.S. Energy Information Administration, Thomson Reuters

July 12, 2016

Unplanned supply disruptions tighten world oil markets and

OPEC supply disruptions

non-OPEC supply disruptions

Sources: U.S. Energy Information Administration

July 12, 2016

During 2003-2008, OPECs spare production levels were low,

Sources: EIA Short Term Energy Outlook, Thomson Reuters

July 12, 2016

Sources: EIA Short Term Energy Outlook, Thomson Reuters

July 12, 2016

Inventory builds go hand-in-hand with increases in future oil

$/bbl change (year-on-year)

OECD liquid fuels inventory

WTI crude 12th - 1st futures price spread

Sources: EIA Short Term Energy Outlook, Thomson Reuters