What drives crude oil prices?

An analysis of 7 factors that influence oil markets,

with chart data updated monthly and quarterly

September 9, 2015 | 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

75

U.S. spare
capacity
exhausted

Low spare
capacity

9-11 attacks
Saudis abandon
swing producer role
Asian financial crisis

50

25

OPEC cuts targets

4.2 mmbpd

Iranian
revolution
Arab Oil Embargo

0
1970

1975

1980

OPEC cuts targets

1.7 mmbpd

Iraq invades Kuwait

1985

1990

1995

imported refiner acquisition cost of crude oil

2000

2005

2010

2015

WTI crude oil price

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

September 9, 2015

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

WTI

Brent

Mars

Tapis

Dubai

Sources: Bloomberg, Thomson Reuters

September 9, 2015

Crude oil prices are the primary driver of petroleum product

prices

Hurricane Katrina shuts

down refineries & pipelines

Unplanned refinery
down-time
Post-hurricane
refinery repairs

Sources: EIA Short Term Energy Outlook, Thomson Reuters

September 9, 2015

Economic growth has a strong impact on oil consumption

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

September 9, 2015

Changes in expectations of economic growth in can affect oil

prices
percent GDP growth in non-OECD countries (annual expectations)
8

0
Jan '12

Jul '12

forecast year:

Jan '13

2012

Jul '13

2013

Jan '14

2014

Jul '14

2015

Jan '15

Jul '15

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

September 9, 2015

In OECD countries, price increases have coincided with lower

consumption
percent change (year-on-year)

price per barrel (real 2010 dollars)

150

100

50

-2

-4

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

OECD liquid fuels consumption

WTI crude oil price

Sources: EIA Short Term Energy Outlook, Thomson Reuters

September 9, 2015

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

Sources: EIA Short Term Energy Outlook, Thomson Reuters

September 9, 2015

Changes in non-OPEC production can affect oil prices

Sources: EIA Short Term Energy Outlook, Thomson Reuters

September 9, 2015

Non-OPEC supply expectations indicate changes in market

sentiment concerning oil supply
million barrels per day (annual expectations)
59.0
58.5
58.0
57.5
57.0
56.5
56.0
55.5
55.0
54.5
54.0
53.5
53.0
52.5
52.0
51.5
51.0

Note: Starting in January of each year, each line shows the

expected forecast of non-OPEC supply for the specified calendar
year, which tends to move toward the actual realized supply

outcome as the year progresses.

2011

2012

forecast year:

2013

2012

2013

2014

2014

2015

2015

2016

Sources: EIA Short Term Energy Outlook

September 9, 2015

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

80

1.5

60

40

0.5

20

-0.5

-20

-1

-40

-1.5

-60
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Saudi Arabia crude oil production

2011

2012 2013 2014 2015

WTI percent change

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

September 9, 2015

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

OPEC supply disruptions

Jul '13

Jan '14

Jul '14

Jan '15

Jul '15

non-OPEC supply disruptions

Sources: U.S. Energy Information Administration

September 9, 2015

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

September 9, 2015

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

September 9, 2015

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)

250

25

200

20

150

15

100

10

50

-50

-5

-100

-10

-150

-15

-200

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

OECD liquid fuels inventory

WTI crude 12th - 1st futures price spread

Sources: EIA Short Term Energy Outlook, Thomson Reuters

September 9, 2015

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

Source: Bloomberg

September 9, 2015

16

Physical participants (producers, merchants, processors, and end users) U.S.

futures market contract positions
number of contracts (thousands)
500
400
300
200
100
0
-100
-200
-300
-400
-500
-600
2008

2009

2010

producers/merchants long

2011

2012

2013

producers/merchants short

2014

2015

producers/merchants net

Source: CFTC Commitment of Traders

September 9, 2015

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

money managers long

2011

2012

money managers short

2013

2014

2015

money managers net

Source: CFTC Commitment of Traders

September 9, 2015

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 %
Soybeans: 5.7 %

Soybean Oil: 2.8 %

Sugar: 4.0 %

Wheat: 4.5 %

Source: Bloomberg

September 9, 2015

19

Commodity index investment flows have tended to move

together with commodity prices
percent change (year-on-year)
200
150
100
50
0
-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)

September 9, 2015

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

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

2015

000

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

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

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

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

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

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

Gold

00

< -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

September 9, 2015

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

U.S. Dollar

# # # # # # # # # # # # # # # 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

< -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

September 9, 2015

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

September 9, 2015

23