US

Crude Reserve Modeling

Theoretically,petroleuminventorylevelsareameasureofthebalanceorimbalancebetween petroleumsupply(domesticproductionandimports)anddemand,andthusprovideagoodmarket barometerforcrudeoilprice(e.g.spot,futures,etc.)changes. TheUSEnergyInformationAdministration(EIA)PetroleumStatusReportprovidesinformationonthe weeklychangeinpetroleuminventoriesintheU.S.,whetherproducedlocallyorabroad.Thisweekly reportgivesanoverviewofthelevelofcrudereservesheldandproducedbytheU.S.bothdomestically andabroad.Itisanindicatorofcurrentoilprices.

Why should we care?

Thelevelofinventorieshelpsinvestorstoestimatethepricesforpetroleumproducts(e.g.gasoline, heatingoil,diesel,etc.).Justlikeanyothergoodsandservices,pricesforpetroleumproductsare determinedbysupplyanddemand. Furthermore,crudeoilisanimportantcommodityintheglobalmarketandplaysacrucialpartofthe economy,sofluctuationsinitspricehaveadirectinfluenceonconsumerprices.Assuch,iflowreserves arereported,crudeoilpricesaremostlikelytoincreaseandthereforedriveupconsumerpricesaswell. Inthispaper,wewillmodelthedynamicsinthecrudeoilstockpile(includingSPR)levelovertime,and projectaforecastforthenext12months.

Background
Thegeneraldemandforpetroleumproductsishighlyseasonalandisgreatestduringthewintermonths, whencountriesintheNorthernHemisphereincreasetheiruseofdistillatedheatingoilsandresidual fuels.Supplyofcrudeoil,includingbothproductionandnetimports,alsoshowsasimilarseasonal variationbutwithasmallermagnitude. Duringthesummermonths,supplyexceedsdemandandpetroleuminventoriesnormallybuild;whereas duringthewinter,demandexceedssupplyandinventoriesaredrawndown.Asaresult,inventoriesalso demonstrateseasonality.

Analysis
Foroursampledata,wellusetheEIAdatafromtheweeklypetroleumstatusreportbetweenJanuary 1991(PostGulfWar)andAugust17th,2012.TheEIAsourcekey(i.e.designation)forthistimeseriesis WCRSTUS1.

USCrudeReserveModeling

SpiderFinancialCorp,2012

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USOilReserve (inc.SPR)

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Atfirstglance,thedatadoesnotexhibitthe12monthseasonalitythatwewereanticipating,solets lookcloser. Now,tobetterdistributethevalues,wellcomputethelogarithmictransformationofthetimeseries anduseitprimarilyinouranalysis. Usingsummarystatistics,thetimeseriesisseriallycorrelatedanditsprobabilitydistributionexhibitsfat tails.

Furthermore,thecorrelogramanalysis(i.e.ACFandPACFplots)uncoveranintegrationissuewithalag orderofone:

USCrudeReserveModeling

SpiderFinancialCorp,2012

Also,lookclosertothepartialautocorrelationnearlagorder5255.Theleapyearphenomenonmakes itdifficulttopinpointaseasonlengthinnumberofweeks. Toovercomethisproblem,wellusethemonthlystocklevelandmodelitinstead.TheEIApublishesthe monthlycrudereservestockpilelevel,buttheselevelsarepublishedonceamonthandaregenerallyfor thepreviousthreemonthperiod. Formonthlytimeseries,wellinterpolatethereservelevelonthelastdayofeachmonth(similartothe EIAmonthlyreport)usingtheweeklytimeseries. Letsrerunthecorrelogramanalysisonthelogtransformedmonthlytimeseries:

USCrudeReserveModeling

SpiderFinancialCorp,2012

ThecorrelogramplotsuggestsaseasonalARIMA(SARIMA)modelwithaseasonlengthof12months. WellproposeaspecialcaseofSARIMAtheAirlineModel.TheAirlineModelcannotonlycapturethe seasonality,butitrequiresonlythree(3)parameterstoestimate,soitistypicallyagoodstartingpoint. UsingtheNumXLAirlinewizards,wespecifieda12monthAirlinemodelandcalibrateditsparameter valuesusingthelogmonthlylevels.

Thecalibratedparametersvaluesyieldastablemodelandsatisfytheunderlyingmodelassumptions.In short,theAirlinemodelisareasonablecandidatemodelforthemonthlyloglevelprocess. Interpretation:

(1 L)(1 L12 ) xt zt (1 L)(1 L12 )at

Themodelissayingthattheyearoveryearofthemonthlychange( zt )isbasicallyaspecialmoving averageprocessoforder13. Letsgoaheadnowandusethemodelforourforecast:

USCrudeReserveModeling

SpiderFinancialCorp,2012

TheAirlinemodelsfunctionscomputethemeanandconfidenceintervalofthemonthlyloglevel.To movetheforecastbackintobarrelsunit,wetooktheexponentialtransformandadjustedthemean forecastasfollows: Where:

E[YT n ] e

xT n

2 T n

T2 n istheforecasterrorattimeT+n
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Inthegraphabove,thedottedlinerepresentstheAirlinemeanforecastandtheshadedareaisthe95% confidenceinterval. EIA Weekly Reports and forecast Toforecastthecrudeoilreservelevelforanyarbitraryfuturedate(otherthantheendofthemonth), wesimplyinterpolatethevalueofthisdateusingthemonthlyforecast.Thesamecanbesaidforthe confidenceintervallimits. ForthecurrentmonthwhereEIAissuedoneormoreofitsweeklyreports,weusethelatestreport valueandtheforecastedendofmonthvaluetointerpolatethevalueforanintermediatedate.

Conclusion
Inthispaper,weanalyzedtheweeklytimeseriesofcrudeoilreservelevelsanddemonstrateditskey statisticalproperties:integrationandseasonality.Next,usingtheweeklytimeseries,weinterpolated themonthlytimeseriesandconstructedanAirline(12)model.Thecalibratedmodelsvaluessatisfiedall assumptions.

USCrudeReserveModeling

SpiderFinancialCorp,2012

UsingAirline(12)weprojectedan18monthforecastforthecrudereservelevelandconstructeda95% confidenceinterval.

USCrudeReserveModeling

SpiderFinancialCorp,2012