1. Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015

4. Literature Medlock and Jaffe (2009) 2007-2008 speculation Hamilton (2009) speculation, OPEC, scarcity rent Dvir & Rogoff (2009) 1896-2008 price behavior Kilian (2010) S&D shocks Kellogg (2014) Impact of infill drilling on investment

5. Components Demand (consumption, additions to storage) Supply (production, imports, withdrawals from storage) Futures

6. Demand (consumption, storage in)

8. Supply (base production, new production, storage out, imports)

12. Storage

14. Futures (commercial and non-commercial traders)

15. Futures Market Commercial (arbitrage) traders are those whose primary businesses are exposed to oil price fluctuations and hedge risks in futures markets to stabilize cash flows. Non-commercial (speculative) traders speculate on crude oil price movements.

22. Contango/Backwardation If C4>C1, then DIFF>0 – Contango If C4<C1, DIFF<0 - Backwardation

25. Market(s) Demand for Crude Oil Inverse Supply of Crude Oil Futures Price Data from EIA, Baker Hughes: Weekly 1/1/1986 – 10/1/2015

26. Model (ARCH/GARCH- in means) Equation 1: Quantity Demanded is a function of: – WTI Spot Price [ -/- ] * – Prime Rate [+/+] * – + Change in Storage [ +/-] – S&P [+/+] * – Time [+/+] * – Binaries: Recession [-/-] *, 9/11[-/+] * – Variance Terms Recession (-/-)*; 9/11 (+/+)* * Significant at 5% or greater

27. MODEL (ARCH GARCH - in means) Equation 2: WTI Spot Price is a function of: – Futures Price (+/+)* – Oil Rig Count (+/+)* – Production (+/+)* – Change in Storage (-/-)* – Contango/Backwardation (+/-)* – Open Interest NC Short (+/+)*; NC Long (-/-)*: NC Spread (+/+)*; CS Short (+/+)*; CL (-/-)* – Variance Terms CFMA (+/+)*; 9/11 (+/+)* * Significant at 5% or greater

28. Equation 3: Futures Price is a function of: – Open Interest (+/+)* – CFMA (+/+)* – S&P (+/+)* – Gold (-/+)* – Days of Storage (-/+) – Time (?/-)* – Variance Terms: 9/11 (+/+)* MODEL (ARCH GARCH - in means) * Significant at 5% or greater

29. Conclusions Market Fundamentals are Significant Storage Is Significant Shocks Are Significant Financial Markets and Rules are Significant Significance of Relative Impacts Changes Over Time

30. Thank You jchermak@unm.edu rhpatrick@rutgers.edu

31. The Crude Oil Consumer’s Objective Individual Demand for Crude

32. The Producer’s Objective: Aggregate Supply: Individual Producer’s Supply:

33. Equilibrium without Storage or Futures

34. Storage