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

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Presentation on theme: "Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015."— Presentation transcript:

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

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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)

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

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12 Storage

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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.

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

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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


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