Abstract
The focus of this research was to investigate the short-term influence of U.S. crude oil inventories on WTI crude oil prices from 1993 to 2013. This study is important for policy makers who wish to reduce the persistent and growing price volatility of crude oil and its related products as well as businesses such as airline companies who wish to make annual budgetary sales decisions. Using OLS multiple regression, cointegration, VECM and Ex-post forecast techniques; we provide evidence of an inelastic relationship in which a 1% increase in U.S. crude oil inventories is associated with 0.46% decrease in WTI crude oil prices; however this was only valid for 22% of WTI crude oil price variation. We also find that past data on U.S. crude oil inventories could be used to predict future WTI crude oil prices movement. Contrary to literature, the results of the VECM analysis indicate there is no short-run relationship between both variables over the trajectory.
Highlights
The prices of crude oil have indicated the presence of volatility which has been caused by various factors affecting global demand and supply, such as, unexpected weather conditions, price expectations, political crisis, economic growth, OPEC decisions amongst many others
The focus of this research was twofold: first to ‘estimate the relative weight of U.S crude oil inventory amongst other significant explanatory variables in explaining the movement of WTI crude oil prices overtime. It has been widely recorded in the literature on crude oil price and inventories that changes in WTI crude oil prices are a reflection of changes in OECD crude oil inventories following the theory that inventories serve as an intermediary between crude oil demand and supply
The result of empirical analysis using OLS regression revealed this to be true even for an individual country such as the U.S US represents the largest crude oil producing and consuming country (EIA, 2014), following the theory of price determination, changes in U.S crude oil inventories can explain a portion of changes in WTI crude oil prices
Summary
The prices of crude oil have indicated the presence of volatility which has been caused by various factors affecting global demand and supply, such as, unexpected weather conditions, price expectations, political crisis, economic growth, OPEC decisions amongst many others. Recent pattern of oil Olasoji and Acquah-Andoh / Eurasian Journal of Economics and Finance, 4(3), 2016, 64-84 inventory build-up and draw-down can be explained by several factors such as political crisis, financial markets, economic growth as well as speculative actions (Beidas-Strom and Pescatori(2014); Knittel and Pindyck 2013). These have had demonstrable effects on crude oil prices. The EIA (2014) established the basic categories of crude oil price drivers to include crude oil inventory builds among others; and there is extensive research on the effect of each of those explanatory variables put forward by the EIA in determining the price of crude oil in the global market. We estimate the relative weight of U.S crude oil inventories amongst other significant explanatory variables in explaining the movement of WTI crude oil prices overtime and investigate the future impact of changes in U.S crude oil inventory levels on WTI crude oil prices using data from 1993 to 2013
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