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Crude Oil/USD Forecast

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A simple classroom forecast of Oil price (done 26/Oct/2010)

A simple classroom forecast of Oil price (done 26/Oct/2010)

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Crude Oil/USD Forecast Crude Oil/USD Forecast Presentation Transcript

  • Crude Oil/USD
  • Agenda 1.Introduction 2.Supply & Demand 3.US Economy & Dollar Devaluation 4.Paper Trading 5.Risk Premium 6.Forecast 7.Will OPEC change USD denomination of oil? 8.Key Takeaways
  • What is crude oil? Crude oil, commonly known as petroleum, is a liquid found within the Earth comprised of hydrocarbons, organic compounds and small amounts of metal. Crude oil is refined into diesel, gasoline, heating oil, jet fuel, kerosene, etc. Classification by: • Origin (e.g., West Texas Intermediate, WTI or Brent) • Weight (light, intermediate or heavy) Crude oil production: • Sulfur content (sweet /sour). • Extraction/ drilling from oil reserves. • About 80% of the world's readily accessible reserves are located in the Middle East. • Top 5 oil producing countries: Saudi Arabia, Russia, United States, Iran, and China. +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • Trading of Crude Oil Types of Transaction Spot Transaction Futures Contract M a j o r T r a d i n g P l a t fo r m : I n t e r c o n t i n e n t a l E xc h a n g e ( I C E ) Ne w Yo r k M e r c a n t i l e E xc h a n g e ( N Y M E X ) Major Oil Price Benchmark London-based Brent U S - b a s e d We s t T e x a s I n t e r m e d i a t e ( W T I ) OPEC Contract +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • 4 Key Determinants 1. Balance of Supply & Demand 2. Dollar Strength 3. Paper trading 4. Risk Premium +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • Oil Supply Oil Producers OPEC •! Russia and Saudi Arabia produced •! Cartel of 12 countries : Algeria, 25% of world’s oil production Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE, Venezuela •! To regulate supply and price of oil •! Produced 42% of the world's oil production •!Account for 78% of world’s proven oil reserve •! OPEC Production Allocation +,-*.'//-0* 2%--5$* 85/3$* :,;<* 9,43*9$3"&* ?30* !"#$%&'()%"* >%$3(5;#* 1*2345"&* .#$3"6#7* 9$5&,"6* 8$34,'4* ="5-0;,;* 95<35@50;*
  • Oil Supply Factors affecting Supply •! Oil Demand •! OPEC policy •! Unforeseen Situations (E.g. Damage Oil Facilities, War) +,-*.'//-0* 2%--5$* 85/3$* :,;<* 9,43*9$3"&* ?30* !"#$%&'()%"* >%$3(5;#* 1*2345"&* .#$3"6#7* 9$5&,"6* 8$34,'4* ="5-0;,;* 95<35@50;*
  • Production cut by OPEC Unforeseen Situation Pipeline Closure +,-*.'//-0* 2%--5$* 85/3$* :,;<* 9,43*9$3"&* ?30* !"#$%&'()%"* >%$3(5;#* 1*2345"&* .#$3"6#7* 9$5&,"6* 8$34,'4* ="5-0;,;* 95<35@50;*
  • Oil Demand Factors affecting Demand GDP growth Seasons of the Year Demand for Petroleum-based product (e.g. Heating oil, Gasoline) +,-*.'//-0* 2%--5$* 85/3$* :,;<* 9,43*9$3"&* ?30* !"#$%&'()%"* >%$3(5;#* 1*2345"&* .#$3"6#7* 9$5&,"6* 8$34,'4* ="5-0;,;* 95<35@50;*
  • Oil Demand World GDP 0.7166 Developed GDP GDP Developing GDP 0.6757 0.7617 •! Strong positive correlation (r =0.71) between World Emerging market GDP 0.7770 GDP and oil price World Production •! Emerging countries has a higher correlation, r = 0.78 Opec Production 0.5646 0.5384 Non-Opec Production 0.5319 World Consumption 0.5815 OECD Consumption 0.3489 Non OECD Consumption 0.7229 World Reserves 0.5184 OPEC Reserves 0.3367 World Inventories (Year end) 0.6299 Average Inventories 0.6224 +,-*.'//-0* 2%--5$* 85/3$* :,;<* 9,43*9$3"&* ?30* !"#$%&'()%"* >%$3(5;#* 1*2345"&* .#$3"6#7* 9$5&,"6* 8$34,'4* ="5-0;,;* 95<35@50;*
  • US Economy & Dollar Devaluation
  • US Dollar Strength Dollar Value Determinants •!GDP! •!Unemployment rate! •!National debt! •!Interest rate! •!Inflation rate! •!Trade! +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • US Economic Growth - Increased 1.6% in Q2! - Over $13 trillion! - 89% of GDP in Q1! - 9.6% in Sep 2010! +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • US Economic Growth - Benchmark interest rate: 0.25%! - Inflation rate last reported at 1.1% in Aug 2010, down from a peak of 5.6% in Jul 2008! +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • US Trade Main Impor ts! Main Expor ts! •!F u e l s ! •!No n - a u t o c o n s u m e r •!M a c h i n e r y & Main Trading goods! Equipment! Par tners! •!P r o d u c t i o n •!I n d u s t r i a l S u p p l i e s ! •!C a n a d a ! machiner y & •!No n - a u t o c o n s u m e r goods! •!E u r o p e a n Un i o n ! equipment! •!M o t o r v e h i c l e s & •!M e x i c o ! •!No n - f u e l i n d u s t r i a l supplies! parts! •!C h i n a ! •!M o t o r v e h i c l e s & •!A i r c r a f t & p a r t s ! •!J a p a n ! parts! •!F o o d , fe e d , b e v e r a g e s ! •!F o o d , fe e d , b e v e r a g e s ! +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • US Trade - Increased to $123 billion in Q2 from $109 billion in Q1! -!Trade deficit dropped 14% to $42.8 billion in July 2010! -!Total July exports rose 1.8% to $153.3 billion! - Total Imports fell 2.1% to $196.1 billion! +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • US Monetary Policy Expansionary monetary policy results in an economy based largely on debt Increase in money supply leads to dollar decline To bring trade imbalance under control Leads to higher commodity prices Recent Federal Reserve rate cuts to boost US economy accelerated dollar devaluation Investors move capital out to avoid losses leading to further dollar decline Recent FOMC meeting: Fed may add new stimulus measures to boost sluggish economy (quantitative easing) High unemployment rate at 9.6% Weak housing market +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • US Fiscal Policy •Heavy reliance on fiscal policy during latest recession •Huge stimulus bill: American Recovery & Reinvestment Act (2009) •$787 billion in personal & corporate tax cuts •Increased federal aid & direct federal spending •Federal revenues falling due to recession & ARRA tax cuts •Increased fiscal deficits associated with depreciating exchange rate +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • The Dollar Index +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • Impact of Dollar Devaluation I/ SHORT TERM IMPACT •Increased speculation and investment in oil futures: •Hedge against weakening dollar •High profit potential +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • Impact of Dollar Devaluation II.! LONG TERM IMPACT! Reduces purchasing Lesser investment power and in additional Reduced oil Reduce real income! increases domestic capacity and production! inflation! maintenance! Varying impact on OPEC members! •! Countries that import more from US stand to lose less! Cheaper oil in Higher demand for countries with gasoline in US due to Increased oil demand! appreciating reduced number of US currencies! tourists abroad! +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • Impact of Dollar Devaluation EFFECTS OF SUPPLY & DEMAND! Reduced oil supply! Increase in oil prices! Increased oil demand! Higher oil prices! Weaker Higher US dollar! trade deficits! +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • What caused the abnormalities in price?
  • The Bubble? (dual characteristics) Consumption: ~ 86 mb/d Production: ~ 86 mb/d USDX: decrease ~ 12% Oil Price: Quadruple - 400% Oil futures traded volume nearly quadruple from 4.5 -> 15.3 +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • Oil Futures Contracts ICE employed partial electronic trading on November 1, 2004 and shifted its benchmark ICE Brent crude to an all-electronic format on April 7, 2005 NYMEX started electronic WTI futures in 2006 +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • Oil Futures Curve +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • The burst of oil bubble? +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • The burst of oil bubble? +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • Crude Oil Price ($/barrel) Risk Premium = Stability Level of Geopolitical situation +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • Arab Oil Embargo – 1973 Oil crisis •Oct 5, 1973: Yom Kippur War started. The United States and many western countries showed support for Israel •Embargo on the countries supporting Israel curtailed production by 5 million barrels per day •Other countries were able to increase production by a million barrels Net loss of 4 million barrels per day extended through Mar 1974 and represented 7% of the free world production.  •The market price for oil immediately rose substantially, from $3 a barrel to $12. •The extreme sensitivity of prices to supply shortages became all too apparent.   Any doubt the ability to control crude oil prices had passed from the United States to OPEC was removed during the Arab Oil Embargo.  +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • 1979 Energy Crisis •In 1979 and 1980, events in Iran and Iraq led to another round of crude oil price increases. •Iranian revolution resulted in the loss of 2 to 2.5 million barrels per day of oil production between Nov1978 and Jun 1979.  At one point production almost halted. •Sep1980, Iran was invaded by Iraq. By Nov, the combined production of both countries was 6.5 million barrels per day less than a year before. •Consequently worldwide crude oil production was 10% lower than in 1979. •The combination of the Iranian revolution and the Iraq-Iran War cause crude oil prices to more than double (from $14 in 1978 to $35 per barrel in 1981). +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • 1986 Oil Price Collapse •Declining world oil demand and increasing non-OPEC production OPEC cut output significantly in the first half of the 1980s to defend its official price •Saudi Arabia bore most of the production cuts (from over 10 million barrels per day for the period Oct 1980 through Aug 1981 to just 2.3 million by Aug 1985) •Late 1985, Saudi Arabia increased production, and aggressively moved to increase market share. •In response, other OPEC members also increased production and offered netback-pricing arrangements to maintain market share and to offset declining revenues. •These actions resulted in a glut of crude oil in world markets, and crude oil prices fell sharply in early 1986. +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • Gulf War - 1990 Oil Crisis •Iraqi invasion of Kuwait •Followed 6 months of extreme turbulence in world oil markets. •3-year peaks in Jan1990 and then plunged to levels comparable to their 1986 lows by Jun (primary cause: overproduction by Kuwait and the UAE) •Gulf war •Waged by a UN-authorized coalition force from 34 nations led by the US and UK, against Iraq. •6/Aug/1990: UN imposed an immediate and nearly total embargo on oil exports from Iraq and Kuwait, which Iraq had by then absorbed removed almost 5 million barrels a day from the world market. •Government’s Reaction: •Emergency Programs failed •Market interference drove prices even higher. •Prices rose from $21 per barrel at the end of July to $28 on August 6, reaching $46 by mid-October. +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • Other events •OPEC 10% increase in production quota coupled with Asian currency crisis which reduced demand low point of oil price in 1999 •9/11 attack had no major effect on oil price •2005: Damages by Hurricane Katrina led to sudden drop in oil supplies and sent oil price to a high. •Financial crisis 2008 and the ensuing economic recession held down demand +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • 24-month Crude Oil Spot Price +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • One-week Forecast Resistance Support +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • One-week Forecast Price: $83.00
  • One-month Forecast Resistance Support +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • One-month Forecast Price: $82.66 76.4% (81.91) +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • One-year Forecast Alquist and Kilian (2010) found that no change forecast is more accurate than most forecasting models. Random Walk Model y(t)=y(t-1) +ε(t) +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • “Changes in the spot price are unpredictable, so the best forecast of the future spot price of the crude oil is simply the current spot price.” Price volatility: SD = 17.67 Price: $83.06 Price Range: $47.72 - $118.40 +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*
  • “It’s an ideal situation we are in now,” says Ali Naimi, Saudi oil minister. “Consumers are happy, producers are happy. Companies are investing.” "Energy developments in 2009 were dominated by a Voser warned of a global recession and, later in challenging year ahead. ‘So the year, a tentative recovery far in 2010, oil prices have and we can't know how remained firm, and demand durable this recovery will for petrochemicals has be," said Tony Hayward, BP's increased, but refining embattled chief executive margins, oil products demand and spot gas prices all remain under pressure,’ he said. Société Générale SA cut its oil price forecast $88 a barrel for 2011 to $85 as demand growth slows and production outside OPEC expands.
  • Will OPEC denominate oil price not in USD?
  • Key takeaways •Oil prices are highly volatile and are affected by supply & demand, dollar strength, oil speculation and risk premium •Oil is politically driven as it is an essential commodity and it is unequally distributed in the world •Oil has emerged as a separate asset class due to its negative correlation with the dollar and stock markets •In recent years, oil prices are becoming more “forward looking” as speculators increased their share of trading dramatically +',,-.*/* 0%--3$* 63,1$* 98:;* 7821*7$1"&* >1.* !"#$%&'()%"* =%$1(3:#* 0123"&* +#$1"4#5* 7$3&8"4* 6$128'2* <"3-.:8:* 73;13?3.:*