Future Oil Prices Research Articles

Equilibrium commodity prices with irreversible investment and non-linear technologies

Abstract We model oil price dynamics in a general equilibrium production economy with two goods: a consumption good and oil. Production of the consumption good requires drawing from oil reserves at a fixed rate. Investment necessary to replenish oil reserves is costly and irreversible. We solve for the optimal consumption, production and oil reserves policy for a representative agent. We analyze the equilibrium price of oil, as well as the term structure of oil futures prices. Because investment in oil reserves is irreversible and costly, the optimal investment in new oil reserves is periodic and lumpy. Investment occurs when the crude oil is relatively scarce in the economy. This generates an equilibrium oil price process that has distinct behavior across two regions (characterized by the abundance/scarcity of oil). We undertake three empirical tests suggested by our model. First, we estimate key parameters using SMM to match moments of oil price futures as well as other macroeconomic properties of the data. Second, we estimate an affine regime switching model of the oil price, which captures the main features of our equilibrium model and preserves the tractability of reduced-form models. Lastly, we compare the risk premium in short-maturity oil futures implied by our model to the data.

A realistic and integrated model for evaluating oil sands development with Steam Assisted Gravity Drainage technology in Canada

Oil sands resource is the third largest oil reserve, and 70% of the oil sands are in Canada. The emerging of Steam Assisted Gravity Drainage technology has made the commercial development of oil sands economically feasible. However, with the recent oil price crash, the development of oil sands has faced an uphill battle. A realistic and integrated evaluation model is highly needed to overcome difficulties from the low oil price and provide meaningful and valuable information for operators as well as investors to make the right decision. The existing evaluation models have considerable limitations (i.e., the incapability of evaluating integrated oil sands development with Steam Assisted Gravity Drainage technology, the lack of investigation into the input parameters with historical data, and ignoring the effect of the subsurface reservoir, etc.). This study developed an integrated evaluation model through the analyses of a significant amount of actual historical data. This integrated model includes six subcomponent models, ranging from the subsurface reservoir to infield flowline. Data from 35 Canadian oil sands development with 15 internal and external parameters were collected and investigated. The oil price effect was analyzed and quantified through simulations. The breakeven Western Canada Select oil price of $39/bbl. (equal to the West Texas Intermediate oil price of $55/bbl.) and other key price points and distributions were identified. Also, the top seven geological and technical parameters that contribute 86% of the net present value variations were identified and investigated. These quantified effects of external and internal parameters are useful findings for decision making. Considering various price scenarios and uncertainties of the input parameters, this study has concluded that developing oil sands resources with the Steam Assisted Gravity Drainage technology is economically feasible and socially beneficial after we take all stakeholder interests into consideration, which is true even with the sustainable and realistic oil price in the foreseeable future.

The VEC-NAR model for short-term forecasting of oil prices

The prediction of future crude oil prices is highly challenging due to three characteristics of crude oil prices, namely, their lag, nonlinearity, and interrelationship among different oil markets, which cannot be handled simultaneously by most traditional crude oil price forecasting models. This paper proposes a new hybrid vector error correction and nonlinear autoregressive neural network (VEC-NAR) model to deal with these characteristics simultaneously. Firstly, a VEC model is used to optimize the lag of crude oil prices and determine the interrelationship which distinguishes the endogenous and exogenous variables. Then, the optimal results obtained by the VEC model are combined with a NAR model which effectively depicts nonlinear component, to forecast crude oil prices. The data of Brent oil prices from January 1, 2003 to December 31, 2014 were used as the empirical sample to test the effectiveness of our proposed model which is compared with those well-recognized methods for crude oil price forecasting. The results of Diebold-Mariano test demonstrated that the VEC-NAR model provided superior forecasting accuracy to traditional models such as GARCH class models, VAR, VEC and NAR model in multi-step ahead short-term forecast.

The Saudi 2014 gambit: a counterfactual analysis

The November 2014 Saudi gambit to increase oil production and drive down prices was a deliberate decision to quell the shale oil revolution. Ostensibly, that decision has been very costly to the Saudis, but the relevant question is would they find themselves worse off had they not acted. This paper presents a counterfactual analysis of that decision and finds that to have continued to cut production to sustain high prices would have been worse yet. Consequently, because of the shale revolution, future oil prices appear likely to fluctuate between a new floor and new ceiling price. A critical question then becomes what role will OPEC play in affecting prices within this new range of variation. This paper presents two contrasting views.

Relationship between Spot and Future Prices of Crude Oil: A Cointegration Analysis

The study was intended to reveal the relationship among the spot and future price of crude oil, which in turn will help in determining the prices of crude oil. While structuring a portfolio, high correlation among assets alone cannot be taken as a satisfactory measure for long run diversification paybacks. There is a crucial need to enhance the traditional risk-return modeling methodologies by giving due consideration to common long term trends among the asset prices. Considering this pressing need, the present paper attempts to explore the long run and short run relationship between spot and future prices of crude oil using time series data. To estimate the long and short run dynamics of crude oil prices, the present study applies the Johansen cointegration, and vector error correction modelling to time series analysis.

Empirical study of the functional changes in price discovery in the Brent crude oil market

Oil is an important source of energy and strategic materials. Understanding the function of price discovery in the futures market, the role of the futures market can be better played, and it is of great significance to ensure the security of energy supply. In this paper, the relationship between futures price and spot price is investigated by means of econometrics, to study price discovery modes on the futures market. The Brent crude oil (2007 to 2016) future price and spot price data were used in the study. It is found that, in GS, IS and PT models, the IS and PT model have their own advantages, which can be combined with two models to calculate the level of price discovery while the GS model is invalid. Comparing the price discovery level from 2007 to 2016, most of the price discovery of the oil futures market is higher. At the same time, the volatility of price is not the main reason behind price discovery. The main factors leading to the decrease of price discovery are the development of the macroeconomy and the degree of price volatility.a

E&P Notes (November 2017)

E&P Notes Permian Winning Streak Could Be Running Out Stephen Rassenfoss, JPT Emerging Technology Senior Editor Hot shale plays tend to fall short of expectations after a few years, and the Permian Basin will be the next big test of the pattern. A recent technical paper by Robert Clarke, research director for Lower 48 Upstream for Wood Mackenzie, questions whether future drilling in the Permian will hit 5 million B/D in 2025 as the consultancy has predicted. Based on what he has been learning recently, some of it reported in SPE technical papers, the actual results could be worse or better, depending on how well the industry solves the problems that will come with intensive development in the Permian. Startup Aims To Advance Rocket Fuel Technology for Fracturing Stephen Whitfield, Senior Staff Writer A startup company in Canada is developing a tool that may help operators realize savings in resources and manpower in their fracturing operations. The PSI-CLONE tool from RocketFrac Services uses a proprietary solid rocket fuel mixture as a propellant fracturing mechanism which eliminates the need for significant water volumes. When loaded into the tool, deployed down a well, and ignited, the propellant releases high-pressure gas and creates enough pressure to produce fractures at targeted sites along the wellbore. The PSI-CLONE tool, which holds the propellant, is reusable. Once the propellant has burned out completely, the tool can be reloaded with another block of fuel. The company states that the system requires a single coiled tubing unit, as opposed to the multiple pumper trucks and water tanks used for hydraulic fracturing, and requires three to five onsite personnel Total Signs Deal With Chevron for Gulf of Mexico Acreage Supermajor Total increased its footprint in the US Gulf of Mexico, capturing seven prospects operated by Chevron. The agreement covers 16 blocks. Total, which recently increased its stake in the US Gulf of Mexico with its takeover of Maersk Oil, will participate in the seven wells through sharing between 25–40% interest. The prospects cover two promising plays: the Wilcox in the central Gulf of Mexico, next to the Anchor discovery; and the Norphlet, in the eastern Gulf of Mexico, near the Appomattox discovery. The first well already spudded in late July on the Ballymore prospect in the Mississippi Canyon. Energy Panel: Efficiency Focus Still Necessary in an Era of Transition Stephen Whitfield, Senior Staff Writer The oil price downturn has changed the way the oil and gas industry does business, and a panel of analysts and industry executives said that reinvention and creativity will be essential to surviving in a new reality. Held at the Global Energy Transitions Summit on the Rice University campus, the panel discussion featured an extensive look at how companies have managed to stay afloat in the current economic landscape. In September, oil prices reached their highest levels since April, but while industry hopes to see that figure sustain above $50/bbl and possibly reach $60, the panelists cautioned against getting overly enthusiastic. Greg Hill, president and COO of Hess, said “lower for longer” was still the primary factor behind his company’s operational strategy, and that it is not advantageous to build a business plan based on the possibility of future oil price growth.

Optimal shale oil and gas investments in the United States

We present a comprehensive supply chain optimization model to determine optimal shale oil and gas infrastructure investments in the United States. The model encompasses multiple shale plays, commodities, plant locations, conversion technologies, transportation modes and both local and foreign markets. The dynamic evolution of supply, demand and price parameters and the uncertainty in parameter realizations are fully taken into account. Imposing two different scenario sets over a time horizon of twenty-five years, the model maximizes the expected net present value of the entire undertaking. We analyze the features of the optimal infrastructure investments and associated operating decisions, perform case studies which highlight the importance of incorporating uncertainty into the model and analyze the stability of the stochastic solutions as the degree of uncertainty changes. The overall opportunity set of investments is sparse, and there is a tendency for over-investment in new liquefied natural gas capacity when the uncertainties in future oil prices are not taken fully into account.

Non-renewable Resources and the Intergenerational Equity Problem in Saudi Arabia

This study examines the intergenerational equity problem of Saudi Arabia, a country that is highly dependent on oil, a non-renewable resource, for most of her income. The first part which is introductory covers the definition of the main concepts, the importance of energy and the Saudi Arabian economic trend. The second part covers oil production and the alternative and future strategies. The paper has articulated documentation as the major source of information, while maintaining review through thinking holistically as the drive to making analyses of the discussion. It is a case study design as it focuses on Saudi Arabia. The third part of the paper discusses the challenges to models, alternatives, and the impact of future price of oil. The paper concludes that managing an economy which has the strength of nonrenewable resource such as oil, need highly adept understanding of resource management while containing other industrial products to support the economy.

Speculation in Commodity Futures Markets, Inventories and the Price of Crude Oil

This paper examines the role of inventories in refiners’ gasoline production and develops a structural model of the relationship between crude oil prices and inventories. Using data on inventories and prices of oil futures, I show that convenience yields decrease at a diminishing rate as inventories increase, consistent with the theory of storage. In addition to exhibiting seasonal and procyclical behaviors, I show that the historical convenience yield averages about 18 percent of the oil price from March 1989 to November 2014. Although some have argued that a breakdown of the relationship between crude oil inventories and prices following increased financial investors’ participation after 2004 was evidence of a speculative effect, I find that the proposed price-inventory relationship is stable over time. The empirical evidence indicates that crude oil prices remained tied to oil-market fundamentals such as inventories, suggesting that the contribution of financial investors’ activities was weak.

Early warning model based on correlated networks in global crude oil markets

Applying network tools on predicting and warning the systemic risks provides a novel avenue to manage risks in financial markets. Here, we construct a series of global crude oil correlated networks based on the historical 57 oil prices covering a period from 1993 to 2012. Two systemic risk indicators are constructed based on the density and modularity of correlated networks. The local maximums of the risk indicators are found to have the ability to predict the trends of oil prices. In our sample periods, the indicator based on the network density sends five signals and the indicator based on the modularity index sends four signals. The four signals sent by both indicators are able to warn the drop of future oil prices and the signal only sent by the network density is followed by a huge rise of oil prices. Our results deepen the application of network measures on building early warning models of systemic risks and can be applied to predict the trends of future prices in financial markets.

Resource extraction with a carbon tax and regime switching prices: Exercising your options

This paper develops a model of a profit maximizing firm with the option to exploit a non-renewable resource, choosing the timing and pace of development. The resource price is modelled as a regime switching process, which is calibrated to oil futures prices. A Hamilton-Jacobi-Bellman equation is specified that describes the profit maximization decision of the firm. The model is applied to a problem of optimal investment in a typical oils sands in situ operation, and solved for critical levels of oil prices that would motivate a firm to make the large scale investment needed for oil sands extraction, as well as to operate, mothball or abandon the facility. Regime shifts can have an important effect on the optimal timing of investment and extraction. The paper examines the effect of several carbon tax schemes on optimal timing of construction, production and abandonment. A form of Green Paradox is identified.

Evidences for a structural change in the oil market before a financial crisis: The flat horizon effect

There are growing evidences that the commodity bubble in the 2000s had a major impact in the 2007–08 financial crisis. A salient feature of this commodity bubble was the dramatic increasing in the correlation of indexed commodities with oil price following the financialisation of the oil market. In this paper we suggest that, besides the growing demand from emerging economies and the following inflow of money from speculative traders, the introduction of the electronic platform could have had an important and underestimated effect on the oil market. Our analysis of the spot and futures oil prices at the NYMEX based on the Generalized Hurst Exponent confirms that the period 2004–2007 is pivotal in the oil market and corroborates the hypothesis that a structural change occurred in both markets. The evident decrease in multifractality suggests a flattening of the time horizon in financial oil markets and the coexistence of long-termism and short-termism. This structural change could partially explain the observed increase of correlations between commodities and oil price.

The impact of oil prices on bioenergy, emissions and land use

We evaluate how alternative future oil prices will influence the penetration of biofuels, energy production, greenhouse gas (GHG) emissions, land use and other outcomes. Our analysis employs a global economy wide model and simulates alternative oil prices out to 2050 with and without a price on GHG emissions. In one case considered, based on estimates of available resources, technological progress and energy demand, the reference oil price rises to $124 by 2050. Other cases separately consider constant reference oil prices of $50, $75 and $100, which are targeted by adjusting the quantity of oil resources. In our simulations, higher oil prices lead to more biofuel production, more land being used for bioenergy crops, and fewer GHG emissions. Reducing oil resources to simulate higher oil prices has a strong income effect, so decreased food demand under higher oil prices results in an increase in land allocated to natural forests. We also find that introducing a carbon price reduces the differences in oil use and GHG emissions across oil price cases.

Crude oil price analysis and forecasting based on variational mode decomposition and independent component analysis

As one of the most vital energy resources in the world, crude oil plays a significant role in international economic market. The fluctuation of crude oil price has attracted academic and commercial attention. There exist many methods in forecasting the trend of crude oil price. However, traditional models failed in predicting accurately. Based on this, a hybrid method will be proposed in this paper, which combines variational mode decomposition (VMD), independent component analysis (ICA) and autoregressive integrated moving average (ARIMA), called VMD–ICA–ARIMA. The purpose of this study is to analyze the influence factors of crude oil price and predict the future crude oil price. Major steps can be concluded as follows: Firstly, applying the VMD model on the original signal (crude oil price), the modes function can be decomposed adaptively. Secondly, independent components are separated by the ICA, and how the independent components affect the crude oil price is analyzed. Finally, forecasting the price of crude oil price by the ARIMA model, the forecasting trend demonstrates that crude oil price declines periodically. Comparing with benchmark ARIMA and EEMD–ICA–ARIMA, VMD–ICA–ARIMA can forecast the crude oil price more accurately.

The Cushing OK Crude Oil Futures Price Pass - Through to New York Harbor Reformulated RBOB Regular Gasoline Futures Price

This study utilizes an Autoregressive Distributed Lag model to investigate the nature of crude oil futures price pass-through since 2006. The empirical results reveal a very high but incomplete short-run pass-through rate from the crude oil futures price to the gasoline futures price of 0.849298 with a corresponding negative long-run pass-through rate of -0.2440894. These empirical findings suggest that traders in the U.S. oil and gasoline futures markets overreact to fluctuations in the crude oil futures price as evidenced by subsequent corrections made over the sample period. The result of the bounds test for a long-term relationship between these two futures prices is inconclusive. The empirical findings further suggest that U.S. futures market traders considered futures prices of gasoline three weeks earlier in determining the current trading price while taking only one week to respond completely to the shock in the crude oil futures price. The empirical findings of this investigation may address the core elements of the price dynamics of the crude oil and gasoline futures markets and advance inquiry into assessment tools that could manage a very complex market challenge, especially for policy makers in countries with transitional economies in Eastern Europe, Caucasus and Central Asia.

Re-appraisal of the Bakken Shale play: Accounting for historic and future oil prices and applying fiscal rates of North Dakota, Montana and Saskatchewan

The ascent of the Bakken shale play as a major U.S. oil producer became threatened by the 2014–2016 oil price fall. This benchmark study assesses and compares the economic performance of typical Bakken wells across three different fiscal regimes: North Dakota (ND) and Montana (MT) in the U.S., and the Canadian province of Saskatchewan (SK). Decline curve analysis and discounted cash flow analysis are applied to evaluate and re-appraise both the productivity and economic performance (internal rate of return, IRR) of typical Bakken wells in each region. For wells of similar estimated ultimate recovery (EUR), the fiscal regime of Montana (IRR 27%) is slightly more advantageous than North Dakota's (IRR 24%). If wells can be identified in SK akin to ND's reference well of 555 Mbbls EUR, the Canadian province provides the most attractive after tax return (180%). However, type curves for Bakken wells in SK and MT analyzed in our study typically have EURs at only 14% and 37% of the ND reference well (EUR∼555 Mbbls) and IRRs adjusted for EUR in MT and SK are negative in both regions at the historic reference price of $80/bbl. A sensitivity analysis using oil prices ranging between $20–100/bbl accounts for any of the price levels seen in the 2014–2016 price fall, and can be projected forward. The evaluation of single well economics and sensitivity to oil price changes and drilling and completion cost is subsequently expanded with a representative firm approach considering certain asset development options with multiple wells in each of the three Bakken jurisdictions (ND, MT, SK).

Inventory shocks and the oil–ethanol–grain price nexus

We analyze the effects of oil and grain inventory data releases on oil, ethanol, corn and soy futures prices. Oil and grain inventory shocks are identified as the percent difference between actual inventory levels and median predictions from a survey of forecasters. Ethanol futures prices alone are found to respond to both oil and grain inventory shocks. Other energy futures prices respond only to oil inventory shocks, while agricultural commodity futures prices respond only to grain inventory shocks.

Do oil futures prices predict stock returns?

Abstract This paper explores stock return predictability by exploiting the cross-section of oil futures prices. Motivated by the principal component analysis, we find the curvature factor of the oil futures curve predicts monthly stock returns: a 1% per month increase in the curvature factor predicts 0.4% per month decrease in stock market index return. This predictive pattern is prevailing in non-oil industry portfolios, but is absent for oil-related portfolios. The in- and out-of-sample predictive power of the curvature factor for non-oil stocks is robust and outperforms many other predictors, including oil spot prices. The predictive power of the curvature factor comes from its ability to forecast supply-side oil shocks, which only affect non-oil stocks and are hedged by oil-related stocks.

Government-Expenditure Crowding-In Effect and Lack of Economic Diversification in Oil-Producing Countries: Lessons from Alberta

In this paper, I examine the impact of oil price shocks, government expenditure, and Chinese investments in the energy sector on Alberta’s economy. The aim is to understand how government expenditures transmit oil-price changes to the economy, thereby exacerbating economic cycles in Alberta, an oil-exporting region, and to provide policy recommendations that could help Alberta benefit from future oil price drops. To my knowledge, I am the first to examine the effects of oil price changes, government expenditures, and investments from China on Alberta’s economy, accounting for inter-industry and household demand effects. I find evidence that Alberta’s manufacturing sector depends heavily on the oil and gas sector; government expenditure has a crowding-in effect that exacerbates economic cycles; Chinese investments in Alberta’s energy sector contribute positively to Alberta’s economy; and West Texas Intermediate (WTI) oil price is an important factor. I use actual WTI values and oil future values to simulate and forecast key explanatory variables. The results are robust to different variations of the model, and when creating in-sample and out-of-sample forecasts. The results of my analyses yield three policy recommendations for Alberta: (a) implement a long-term counter-cyclical fiscal policy, preferably during a boom period; (b) diversify both the oil and gas sector (to increase petroleum product exports) and the manufacturing sector (to increase non-oil related production); and (c) open the economy to additional foreign investment.