Oil Market Model Research Articles

LONG-TERM OIL PRICE FORECASTS: A NEW PERSPECTIVE ON OIL AND THE MACROECONOMY

We examine how future real GDP growth relates to changes in the forecasted long-term average of discounted real oil prices and to changes in unanticipated fluctuations of real oil prices around the forecasts. Forecasts are conducted using a state-space oil market model, in which global real economic activity and real oil prices share a common stochastic trend. Changes in unanticipated fluctuations and changes in the forecasted long-term average of discounted real oil prices sum to real oil price changes. We find that these two components have distinctly different relationships with future real GDP growth. Positive and negative changes in the unanticipated fluctuations of real oil prices correlate with asymmetric responses of future real GDP growth. In comparison, changes in the forecasted long-term average are smaller in magnitude but are more influential on real GDP. Persistent upward revisions of forecasts in the 2000s had a substantial negative impact on real GDP growth, according to our estimates.

Towards a Composite Political Risk Indicator for Country Oil and Gas Industry Stock Market Sectors

The purpose of this paper is to test an international oil and gas market model, hypothesised to arrive at new indicator of pure composite political risk for country oil and gas sectors. Current political risk ratings are largely subjectively quantified and are not frequently published. Investors in oil and gas industry portfolios as well as trade and investment policy formulators should be interested that there is a strong theoretical and practical basis where pure political risk indicators may be obtained daily rather than monthly using stock market generated data. A systemic international capital asset pricing model is a useful framework as long as available financial and economic information is captured along with systemic interdependence and control introduced for country size and wealth effects. If so, an indication of the influence of human (political) factors in each country oil and gas industry sector can be provided.

Non-Linear Oil Price Dynamics: A Tale of Heterogeneous Speculators?

Abstract While some of the recent surges in oil prices can be attributed to a robust global demand at a time of tight production capacities, commentators occasionally also blame the impact of speculators for part of the price pressure. We propose an empirical oil market model with heterogeneous speculators. Whereas trend-extrapolating chartists may tend to destabilize the market, fundamentalists exercise a stabilizing effect on the price dynamics. Using monthly data for West Texas Intermediate oil prices, our STR-GARCH estimates indicate that oil price cycles may indeed emerge due to the non-linear interplay between different trader types.

Non Linear Oil Price Dynamics - A Tale of Heterogeneous Speculators?

While some of the recent surge of oil prices can be attributed to robust global demand at a time of tight production capacities, commentators occasionally also blame the impact of speculators for part of the price pressure. We propose an empirical oil market model with heterogeneous speculators. Whereas trend-extrapolating chartists may tend to destabilize the market, fundamentalists exercise a stabilizing effect on the price dynamics. Using monthly data for WTI oil prices, our STR-GARCH estimates indicate that oil price cycles may indeed emerge due to the nonlinear interplay between different trader types.

Nonlinear Oil Price Dynamics: A Tale of Heterogeneous Speculators?

While some of the recent surge of oil prices can be attributed to robust global demand at a time of tight production capacities, commentators occasionally also blame the impact of speculators for part of the price pressure. We propose an empirical oil market model with heterogeneous speculators. Whereas trend-extrapolating chartists may tend to destabilize the market, fundamentalists exercise a stabilizing effect on the price dynamics. Using monthly data for WTI oil prices, our STR-GARCH estimates indicate that oil price cycles may indeed emerge due to the nonlinear interplay between different trader types.

Why and When do Spot Prices of Crude Oil Revert to Futures Price Levels?

Recent studies of crude oil price formation emphasize the role of interest rates and convenience yield (the adjusted spot-futures spread), confirming that spot prices mean-revert and normally exceed discounted futures. However, these studies don't explain why such is normal. Also, models derived in these studies typically explain only about 1 percent of daily returns, suggesting other factors are important, too. In this paper, I specify a structural oil-market model that links returns to convenience yield, inventory news, and revisions of expected production cost (growth of which is related to backwardation). Although its predictive power is only a marginal improvement, the model fits the data far better. In addition, I find reversion of spot to futures prices only when backwardation is severe. Convenience yield behaves nonlinearly, but price response to convenience yield is also nonlinear. Equivalently, futures are informative about future spot prices only when spot prices substantially exceed futures.

Why and When do Spot Prices of Crude Oil Revert to Futures Price Levels?

Recent studies of crude oil price formation emphasize the role of interest rates and convenience yield (the adjusted spot-futures spread), confirming that spot prices mean-revert and normally exceed discounted futures. However, these studies don't explain why such "backwardation" is normal. Also, models derived in these studies typically explain only about 1 percent of daily returns, suggesting other factors are important, too. In this paper, I specify a structural oil-market model that links returns to convenience yield, inventory news, and revisions of expected production cost (growth of which is related to backwardation). Although its predictive power is only a marginal improvement, the model fits the data far better. In addition, I find reversion of spot to futures prices only when backwardation is severe. Convenience yield behaves nonlinearly, but price response to convenience yield is also nonlinear. Equivalently, futures are informative about future spot prices only when spot prices substantially exceed futures.

The World Oil Market (WOM) Model: An Assessment of the Crude Oil Market Through 2000

The great demand for oil price forecasts has resulted in extensive discussion of possible behavioral and structural relationships to describe this jerky market. On the supply side, much attention has been focused on the inner life of OPEC. Is it or not a cartel? Is it a cartel with a competitive fringe? How strong is the tension between high and low absorbers? Are the depletion policies derived from myopic cash requirements or from long-term optimization schemes?

A model of the world oil market with an OPEC cartel

A world oil market model (WOM) with OPEC treated as a Stackelberg cartel has been developed within the framework of the Generalized Equilibrium Modeling System (GEMS) that is available from Decision Focus, Inc. The U.S. sector of the model is represented by a Liquid Fuels Supply model that was presented previously. The WOM model is described and results obtained with the model for the period 1980–2040 are presented. For comparative purposes, results obtained with the model when OPEC is treated as a competitive producer are also presented. By comparing the world oil price as a function of time from the two calculations, the influence that OPEC may have on the oil market by exploiting all of its market power is quantified. The world oil price as obtained with the WOM model is also compared with world oil price projections from a variety of sources.

The ‘sub-trigger’ crisis: An economic analysis of flexible stock policies

This paper investigates the value of international cooperation during an oil supply disruption. The International Energy Agency provides the aegis for energy cooperation among the industrialized countries, but only an enormous disruption would ‘trigger’ the Agency's emergency mechanism. Smaller (‘sub-trigger’) disruptions have occurred three times in the past decade, and twice, in 1973–1974, and again in 1979, the result was havoc in the international oil markets and substantial economic damage. General consensus credits oil inventory accumulation with exacerbating these shocks and decumulation with averting similar problems during the 1980 disruption. The paper employs a small short-run econometric model of the oil market to examine inventory behaviour and to test coordinated government stockpile drawdowns (termed ‘flexible stock policies’) which have been proposed to address these issues. Impacts on GNP are obtained by solving the oil market model simultaneously with an econometric model of the US macro-economy.