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Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015
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Page 1: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.

Modeling Oil Markets

Janie M. Chermak, University of New MexicoRobert H Patrick, Rutgers University

October 26, 2015

Page 2: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.
Page 3: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.
Page 4: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.

Literature

• Medlock and Jaffe (2009) 2007-2008 speculation• Hamilton (2009) speculation, OPEC, scarcity rent• Dvir & Rogoff (2009) 1896-2008 price behavior• Kilian (2010) S&D shocks• Kellogg (2014) Impact of infill drilling on investment

Page 5: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.

Components

• Demand (consumption, additions to storage)

• Supply (production, imports, withdrawals from storage)

• Futures

Page 6: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.

Demand(consumption, storage in)

Page 7: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.
Page 8: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.

Supply (base production, new production,

storage out, imports)

Page 9: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.
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Page 11: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.
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Storage

Page 13: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.
Page 14: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.

Futures(commercial and non-commercial traders)

Page 15: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.

Futures Market

Commercial (arbitrage) traders are those whose primary businesses are exposed to oil price fluctuations and hedge risks in futures markets to stabilize cash flows.

Non-commercial (speculative) traders speculate on crude oil price movements.

Page 16: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.
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Page 22: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.

Contango/Backwardation

If C4>C1, then DIFF>0 – Contango

If C4<C1, DIFF<0 - Backwardation

Page 23: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.
Page 24: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.
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Market(s)

Demand for Crude Oil

Inverse Supply of Crude Oil

Futures Price

Data from EIA, Baker Hughes: Weekly 1/1/1986 – 10/1/2015

Page 26: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.

Model (ARCH/GARCH- in means)

• Equation 1: Quantity Demanded is a function of:– WTI Spot Price [ -/- ] *– Prime Rate [+/+] *– + Change in Storage [ +/-] – S&P [+/+] *– Time [+/+] *– Binaries:

• Recession [-/-] *, 9/11[-/+] *

– Variance Terms• Recession (-/-)*; 9/11 (+/+)*

* Significant at 5% or greater

Page 27: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.

MODEL (ARCH GARCH - in means)

• Equation 2: WTI Spot Price is a function of:– Futures Price (+/+)* – Oil Rig Count (+/+)*– Production (+/+)*– Change in Storage (-/-)*– Contango/Backwardation (+/-)*– Open Interest

• NC Short (+/+)*; NC Long (-/-)*: NC Spread (+/+)*; CS Short (+/+)*; CL (-/-)*

– Variance Terms• CFMA (+/+)*; 9/11 (+/+)*

* Significant at 5% or greater

Page 28: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.

• Equation 3: Futures Price is a function of:– Open Interest (+/+)*– CFMA (+/+)*– S&P (+/+)*– Gold (-/+)*– Days of Storage (-/+)– Time (?/-)*– Variance Terms:

• 9/11 (+/+)*

MODEL (ARCH GARCH - in means)

* Significant at 5% or greater

Page 29: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.

ConclusionsMarket Fundamentals are Significant

Storage Is Significant

Shocks Are Significant

Financial Markets and Rules are Significant

Significance of Relative Impacts Changes Over Time

Page 31: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.

The Crude Oil Consumer’s Objective

Individual Demand for Crude

Individual Demand for Crude

Page 32: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.

The Producer’s Objective:

Aggregate Supply:

Individual Producer’s Supply:

Page 33: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.

Equilibrium without Storage or Futures

Page 34: Modeling Oil Markets Janie M. Chermak, University of New Mexico Robert H Patrick, Rutgers University October 26, 2015.

Storage


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