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What drives crude oil prices?

An analysis of 7 factors that influence oil markets, with chart data updated monthly and quarterly

October 21, 2011 | 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, quarterly average) 140 120 100 80 60 40 20 0 1970
Iranian revolution Arab Oil Embargo Iraq invades Kuwait OPEC cuts targets 4.2 mmbpd OPEC cuts targets 1.7 mmbpd U.S. spare capacity exhausted Saudis abandon swing producer role 9-11 attacks

imported refiner acquisition cost of crude oil WTI crude oil price

Global financial collapse

Iran-Iraq War Low spare capacity

Asian financial crisis

1975

1980

1985

1990

1995

2000

2005

2010

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

October 21, 2011

World oil prices move together due to arbitrage


dollars per barrel real 2010 dollars, monthly average 150 WTI crude oil Brent crude oil Dubai crude oil Tapis crude oil Mars crude oil

125

100

75

50

25

0 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Sources: Bloomberg, Thomson Reuters, monthly average spot price through September 2011

October 21, 2011

Crude oil prices are the primary driver of petroleum product prices
price per gallon real 2010 dollars, monthly average 5.00
Hurricane Katrina shuts down refineries & pipelines Post-hurricane refinery repairs

price per barrel real 2010 dollars, monthly average 168 Forecast

Unplanned refinery down-time

4.00

126

3.00

84

2.00 U.S. retail price of regular gasoline (left axis) 1.00 2005

42

0 2006 2007 2008 2009 2010 2011 2012

Sources: EIA Short Term Energy Outlook (October 2011), Thomson Reuters

October 21, 2011

Economic growth has a strong impact on oil consumption


percent change (year-on-year) 12 10 8 6 4 2 0 -2 -4 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: EIA Short Term Energy Outlook (October 2011), Thomson Reuters

non-OECD liquid fuels consumption non-OECD GDP

Forecast

October 21, 2011

Economic growth in Asian economies surprised to the upside in 2009 and to the downside in 2008
percent GDP growth in Asia, excluding Japan (annual expectations) 12 2008 10 2010 8 6 4 2 0 2008 2009 2010 2011
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).

2009 2011

Source: IHS Global Insight

October 21, 2011

In OECD countries, price increases have coincided with lower consumption


percent change (year-on-year) 6 Forecast 4 90 price per barrel (real 2010 dollars) 135

45

-2 OECD liquid fuels consumption (left axis) WTI crude oil price (right axis)

-45

-4

-90

-6 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: EIA Short Term Energy Outlook (October 2011), Thomson Reuters

-135

October 21, 2011

Rising oil prices held down global oil consumption growth from 2005-2008, despite high economic growth
percent change (year-on-year) 6 Forecast 4 90 price per barrel (real 2010 dollars) 135

45

-2 World liquid fuels consumption (left axis) World GDP WTI crude oil price (right axis) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-45

-4

-90

Sources: EIA Short Term Energy Outlook (October 2011), Thomson Reuters

October 21, 2011

Non-OPEC production grew rapidly in 2009-2010. EIA expects these increases to slow in 2011-2012.
million barrels per day change (year-on-year) 2.0 non-OPEC liquid fuels production (left axis) WTI crude oil price (right axis) price per barrel (real 2010 dollars) 140 Forecast 105

1.5

1.0

70

0.5

35

0.0

-0.5

-35

-1.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: EIA Short Term Energy Outlook (October 2011), Thomson Reuters

-70

October 21, 2011

Non-OPEC supply expectations were adjusted upward in 20092010 after production decreased during downturn
million barrels per day annual average expectations 53.0 52.5 52.0 51.5 51.0 50.5 50.0 49.5 49.0 48.5 48.0 2008 2009 2010 2011
Sources: EIA Short Term Energy Outlook (October 2011)
Note: Starting in January of each year, each line shows the expected forecast of non-OPEC supply growth for the specified calendar year, which tends to move toward the actual realized growth outcome as the year progresses.

2008 2009 2010 2011

October 21, 2011

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OPEC production often acts to balance the oil market. Cuts in OPEC production targets tend to lead to price increases.
million barrels per day change (year-on-year) 5 4 3 2 1 20 0 0 -1 -2 -3 OPEC production targets (left axis) -4 -5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Sources: U.S. Energy Information Administration, Thomson Reuters

percent change (year-on-year) 100 80 60 40

-20 -40 WTI crude oil price (right axis) -60 -80

October 21, 2011

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During 2003-2008, OPECs spare production levels were low, limiting its ability to respond to demand and price increases
spare capacity (million barrels per day) 7
spare capacity < 2.5 million barrels per day

price per barrel (real 2010 dollars) 140 Forecast 120 100 80 60 40 20 0

6 5 4 3 2 1 0 2001 2002 2003

OPEC spare capacity (left axis) WTI crude oil price (right axis)

2004

2005

2006

2007

2008

2009

2010

2011

2012

Sources: EIA Short Term Energy Outlook (October 2011), Thomson Reuters

October 21, 2011

12

The years 2003-2008 experienced periods of very strong economic and oil demand growth, slow supply growth and tight spare capacity
percent change (year-on-year) 6
spare capacity < 2.5 million barrels per day

price per barrel (real 2010 dollars) 135 Forecast 90

45

-2 World liquid fuels production capacity* (left axis) World GDP (left axis) WTI crude oil price (right axis) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-45

-4

-90

-6
Sources: EIA Short Term Energy Outlook (October 2011), Thomson Reuters

-135

October 21, 2011

13

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) 200 150 100 50 0 -50 -100 -150 -200 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Sources: EIA Short Term Energy Outlook (October 2011), Thomson Reuters

dollars per barrel change (year-on-year) 20 15 10 5 0 -5 -10

OECD liquid fuels inventory (left axis) WTI crude 12th-1st futures price spread (right axis)

-15 -20

October 21, 2011

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Open interest in crude oil futures grew over the last decade as more participants entered the market
average daily open interest in crude oil futures number of contracts (thousands) 1800 1600 1400 1200 1000 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Bloomberg

October 21, 2011

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U.S. exchange-traded short positions by physical participants (producers, merchants, processors, and end users) consistently exceed longs
number of contracts (thousands) 400 300 200 100 0 -100 -200 -300 -400 -500 -600 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 producers/merchants long producers/merchants short producers/merchants net

Source: CFTC Commitment of Traders

October 21, 2011

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Money managers tend to be net long in the U.S. oil futures market
number of contracts (thousands) 350 300 250 200 150 100 50 0 -50 -100 -150 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 money managers long money managers short money managers net

Source: CFTC Commitment of Traders

October 21, 2011

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Crude oil plays a major role in commodity investment


2011 Target Weights of the Dow Jones - UBS Commodity Index
Zinc 2.8% Silver 3.3% Aluminum 5.2% Natural Gas 12% Copper 7.5% Heating Oil 3.6% Gasoline 3.5% Soybeans 7.9% Wheat 4.6% Corn 7.0% Nickel Live Cattle Lean Hogs 2.2% 3.4% 2.0% Crude Oil 15%

Gold 10.4%

Cotton 2.0%

Coffee 2.4% Soybean Oil 2.9% Sugar 3.3%

Source: Dow Jones Indexes, CME Group

October 21, 2011

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Commodity index investment flows have tended to move together with commodity prices
percent changes (year-on-year) 200
Dow Jones UBS Commodity Index Assets under management (five largest public U.S. commodity funds) Commodity index investment reported to CFTC under "special call"

150

100

50

-50

-100 2006 2007 2008 2009 2010 2011


Source: CFTC Special Call Report

October 21, 2011

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Correlations (+ or -) between daily price changes of crude oil futures and other commodities generally rose in recent years
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Energy Natural Gas Gold Metals Copper Silver Soybeans Agriculture Corn Wheat
WTI crude oil price peak < -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 20

October 21, 2011

Correlations (+ or -) between daily returns on crude oil futures and financial investments have also strengthened
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

S&P 500

U.S. Dollar*

U.S. Treasury**
WTI crude oil price peak < -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

* U.S. Dollar Index (DXY), which is a weighted index of a basket of currencies, per U.S. dollar. As the dollar strengthens against other currencies, the value of the index rises. ** U.S. Treasury is based on the negative of the change in yield on 30-year U.S. government bonds because as yields rise, bond prices fall.
Note: Correlations computed quarterly 21

October 21, 2011

For more information


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October 21, 2011

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