What drives crude oil prices?

An analysis of 7 factors that influence oil markets,

with chart data updated monthly and quarterly

January 12, 2016 | Washington, DC

U.S. Energy Information Administration Independent Statistics & Analysis www.eia.gov

 Crude oil prices react to a variety of geopolitical and economic
events
price per barrel (real 2010 dollars)
150

Global financial collapse

125

Iran-Iraq War
100 Low spare
capacity
U.S. spare
75 capacity 9-11 attacks
Saudis abandon
exhausted swing producer role
Asian financial crisis
50

OPEC cuts targets

25 4.2 mmbpd
Iranian
revolution OPEC cuts targets
Iraq invades Kuwait
Arab Oil Embargo 1.7 mmbpd
0
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
imported refiner acquisition cost of crude oil WTI crude oil price

Sources: U.S. Energy Information Administration, Thomson Reuters

January 12, 2016 2

 World oil prices move together due to arbitrage
$/bbl (real 2010 dollars, monthly average)
160

140

120

100

80

60

40

20

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
WTI Brent Mars Tapis Dubai

Sources: Bloomberg, Thomson Reuters

January 12, 2016 3

Crude oil prices are the primary driver of petroleum product
prices

Sources: EIA Short Term Energy Outlook, Thomson Reuters

January 12, 2016 4

Economic growth has a strong impact on oil consumption

Sources: U.S. Energy Information Administration, IHS Global Insight

January 12, 2016 5

 Changes in expectations of economic growth in can affect oil
prices
percent GDP growth in non-OECD countries (annual expectations)
8

0
2012 2013 2014 2015 2016

forecast year: 2012 2013 2014 2015 2016

Note: Starting in January of each year, each line shows the expected forecast of GDP growth for the specified calendar year, which tends
to move toward the actual realized growth outcome as the year progresses. Expectations continue to evolve into the next calendar year as
revised GDP data become available (e.g., 2008 GDP expectations are revised even during 2009).
Source: IHS Global Insight

January 12, 2016 6

 In OECD countries, price increases have coincided with lower
consumption
percent change (year-on-year) price per barrel (real 2010 dollars)
6 150

4 100

2 50

0 0

-2

-4

-6
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

OECD liquid fuels consumption WTI crude oil price

Sources: EIA Short Term Energy Outlook, Thomson Reuters

January 12, 2016 7

Rising oil prices held down global oil consumption growth from
2005-2008, despite high economic growth

Sources: EIA Short Term Energy Outlook, Thomson Reuters

January 12, 2016 8

Changes in non-OPEC production can affect oil prices

Sources: EIA Short Term Energy Outlook, Thomson Reuters

January 12, 2016 9

 Non-OPEC supply expectations indicate changes in market
sentiment concerning oil supply
million barrels per day (annual expectations)
59.0
58.5
58.0 Note: Starting in January of each year, each line shows the
expected forecast of non-OPEC supply for the specified calendar
57.5
year, which tends to move toward the actual realized supply
57.0 outcome as the year progresses.
56.5
56.0
55.5
55.0
54.5
54.0
53.5
53.0
52.5
52.0
51.5
51.0
2011 2012 2013 2014 2015 2016

forecast year: 2012 2013 2014 2015 2016

Sources: EIA Short Term Energy Outlook

January 12, 2016 10

 Changes in Saudi Arabia crude oil production can affect oil
prices
million barrels per day (year-on-year) percent change (year-on-year)
2.5 100

2 80

1.5 60

1 40

0.5 20

0 0

-0.5 -20

-1 -40

-1.5 -60
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Saudi Arabia crude oil production WTI percent change

Sources: U.S. Energy Information Administration, Thomson Reuters

January 12, 2016 11

 Unplanned supply disruptions tighten world oil markets and
push prices higher
million barrels per day
4

0
Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Jul '13 Jan '14 Jul '14 Jan '15 Jul '15 Jan '16

OPEC supply disruptions non-OPEC supply disruptions

Sources: U.S. Energy Information Administration

January 12, 2016 12

During 2003-2008, OPECs spare production levels were low,
limiting its ability to respond to demand and price increases

Sources: EIA Short Term Energy Outlook, Thomson Reuters

January 12, 2016 13

The years 2003-2008 experienced periods of very strong economic and oil
demand growth, slow supply growth and tight spare capacity

Sources: EIA Short Term Energy Outlook, Thomson Reuters

January 12, 2016 14

 Inventory builds go hand-in-hand with increases in future oil
prices relative to current prices (and vice versa)
million barrels change (year-on-year) $/bbl change (year-on-year)
350 35

300 30

250 25

200 20

150 15

100 10

50 5

0 0

-50 -5

-100 -10

-150 -15

-200 -20
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

OECD liquid fuels inventory WTI crude 12th - 1st futures price spread

Sources: EIA Short Term Energy Outlook, Thomson Reuters

January 12, 2016 15

 Open interest in crude oil futures grew over the last decade as
more participants entered the market
number of contracts (thousands)
2,000

1,800

1,600

1,400

1,200

1,000

800

600

400

200

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Bloomberg

January 12, 2016 16

 Physical participants (producers, merchants, processors, and end users) U.S.
futures market contract positions
number of contracts (thousands)
500

400

300

200

100

-100

-200

-300

-400

-500

-600
2008 2009 2010 2011 2012 2013 2014 2015 2016

producers/merchants long producers/merchants short producers/merchants net

Source: CFTC Commitment of Traders

January 12, 2016 17

 Money managers tend to be net long in the U.S. oil futures
market
number of contracts (thousands)
400
350
300
250
200
150
100
50
0
-50
-100
-150
-200
2008 2009 2010 2011 2012 2013 2014 2015 2016

money managers long money managers short money managers net

Source: CFTC Commitment of Traders

January 12, 2016 18

Crude oil plays a major role in commodity investment
2015 Target Weights of the Bloomberg Commodity Index

Lean Hogs: 1.9 %

Crude Oil: WTI: 7.8 %
Live Cattle: 3.3 %
Nickel: 2.1 %
Crude Oil: Brent: 7.2 %
Zinc: 2.4 %
Silver: 4.3 %
Aluminum: 4.6 %

Natural Gas: 8.7 %

Copper: 7.5 %

Heating Oil: 3.8 %

Gasoline: 3.7 %

Gold: 11.9 %

Cotton: 1.5 % Corn: 7.2 %

Coffee: 2.2 %
Soy Meal: 2.7 %
Soybean Oil: 2.8 % Soybeans: 5.7 %

Sugar: 4.0 % Wheat: 4.5 %

Source: Bloomberg

January 12, 2016 19

 Commodity index investment flows have tended to move
together with commodity prices
percent change (year-on-year)
200

150

100

50

-50

-100
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Bloomberg Commodity Index

assets under management (5 largest public U.S. commodity index funds)
commodity index assets under management reported to CFTC under "special call"

Source: Bloomberg, Commodity Futures Trading Commission (CFTC)

January 12, 2016 20

 Correlations (+ or -) between daily price changes of crude oil
futures and other commodities generally rose in recent years

Date 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Natural Gas 0 0 0 1 0 1 0 0 0 1 1 1 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 # 0 0 0 0 0 0 0 0 0 0 # 0 0 0 000 0 0

Gold 0 0# 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 1 1 1 0 0 0 0 1 0 1# 0 1 1 1 0 1 0 0 0 0 0 0 0 0# 0 0 0 0 0

Copper # 0# 0 0 0 0 0# 0 0# 0 1 0 0 0 0 0 0 1 0 1 1 0 1 1 1 1 1 0 1 0 1 1 1 1 1 1 0 0 1 0 0 0 0 100 0 0

Silver 0 0# 0 0 0 0# 0 0 0 0 0 1 0 0 0 0 0 1 1 1 0 0 0 0 1 1 1 0 0 0 0 1 0 1 0 0 0 0 0 0 0 0# 0 000 0 0

Soy # 0# 0# 0# 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 1 1 0 1 0 0 0 0 0 0 0 0 1 0 0 0 0 0# 0 0# 0 000 0 0

Corn # 0## 0 0 0# 0 0 0 0 0 0 0 0 0# 0 0 1 0 0 1 1 0 0 1 0 0# 0 0 0 0 0 0 0 0 0# 0# 0 0 000 0 0

Wheat 0 0# 0 0 0 0# 0 0 0 0# 0 0 0 1## 0 0 0 0 0 1 1 0 1 0 0 0 0 0 0 0 0 0 0 0##### 0 0 00 0 0

< -0.65 -0.65 to -0.4 -0.4 to -0.25 -0.25 to 0.25 0.25 to 0.4 0.4 to 0.65 > 0.65
Negative correlation Positive correlation
Note: Correlations computed quarterly

January 12, 2016 21

 Correlations (+ or -) between daily returns on crude oil futures
and financial investments have also strengthened

Date 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

S & P 500 #### 0 0### 0# 0 0 0# 0 0 0 0# 0# 0 0 0 1 1 0 1 1 1 1# 1 1 1 0 1 1 0 0 1 0 0 0 0 0 0 0 0 0 0

U.S. Dollar # # # # # # # # # # # # # # # 0 # # 0 # # # # # # # # # # # # # # # # # # # # # # # 0 # # # -0 # -0 # 0

U.S. Bonds 0 0 0 0 # 0 0 0 # 0 0 # 0 0 # # # 0 # 0 # 0 # # # # # # # # # # # # # # # # # # # # # 0 # # 0 # -0 # #

WTI Implied Volatility 0 # # 0 # 0 0 # 0 0 0 # 0 # 0 # # # # 0 0 0 # # # # # # # # # # 0 # # # # # # # # # 0 # # 0 -1 # -1 # #

Inflation Expectations 0 0 0 # 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 1 0 1 # 0 0 0 0 0 1 0 0 0 1 1 0 0 1 0 0 # 1 0 0 0 0 0 0 0 1 1 0

< -0.65 -0.65 to -0.4 -0.4 to -0.25 -0.25 to 0.25 0.25 to 0.4 0.4 to 0.65 > 0.65
Negative correlation Positive correlation

Note: Correlations computed quarterly

January 12, 2016 22

For more information
U.S. Energy Information Administration home page | www.eia.gov

Short-Term Energy Outlook | www.eia.gov/steo

Annual Energy Outlook | www.eia.gov/aeo

International Energy Outlook | www.eia.gov/ieo

Monthly Energy Review | www.eia.gov/mer

EIA Information Center

(202) 586-8800 | email: InfoCtr@eia.gov

January 12, 2016 23