The dynamic relations in the US crude oil market

Abstract

This paper revisits the dynamic relationships among the determinants of the real price of the West Texas Intermediate (WTI). Using the classical commodity storage model, we find a strong and significant equilibrium trend among variables of the real price of crude oil, production proxied by drilling rigs, inventories, and demand, which supports the findings by Dvir and Rogoff (2013). Our empirical test shows that oil drilling rigs in the USA serve as a better proxy for oil production. Furthermore, we extend the commodity storage model to include other market factors such as gold, S&P 500, and the US dollar index. We conclude that it is the fundamental supply–storage–demand factors that are significant and making the short–run adjustments towards the long–run equilibrium. The adjustment is not made by gold–stock–currency factors that have been reported in prior studies.