A CASE STUDY OF PREDICTING ARGENTINE

JET FUEL PRICES

Andrew Samuel H
Nishanth A
Ramesh P L
On
11.6.2010
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 Agenda

lLearning Objective
lBackground
lResearch Questions
lScope and Limitations
lMultiple Regression and Stepwise Regression
lPredictors
lModel
lFurther Research
lSummary
l

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 Learning objective

lTo Understand:
lForecasting in Business Application

l
lUse of Multiple Regression for Forecasting


lArgentine oil market



lFactors Influencing Oil price



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 Background


About Argentine Air Force(AAF)
lArgentine Air force was formed in 1945
lThere are about 14,606 personnel and 195 aircraft
lThe Argentine Air Force is one of the three branches of
the Argentine military, having equal status with the
Army and the Navy
l

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 Background cont


Argentine Jet fuel:
lThe AAF consumes more than 12 million gallons of fuel
each year
lIts spends almost 35% of its total material budget in
the acquisition of this resource
lCrude oil is the main element in the production of jet
fuel
lAccurate oil predictions are therefore an important
strategy to protect taxpayer contributions
l

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 Background cont

 Market Condition:
lSince 1907, the history of oil industry in Argentina has been
associated with the ups and downs due to Argentine public
policy
lThe Argentine oil industry was always under the strong influence
of the state until 1989
lThe country’s failure to maintain self sufficiency was due to
lHigh foreign debt
lIncapacity of increasing production rate

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 Background cont


Introducing Privatization:
lIn 1989 Argentina initiated a series of privatization
actions in its oil sector
lIn 1993, the country had totally privatized its oil
production and exploration.
lThis doubled the level of production which resulted in
lAchieving self sufficiency.
lResponding to domestic increase of demand.
lIncrease of level of exportation

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 Background cont


A long-term, fixed price contract ties the AAF to its main
jet fuel provider, REPSOL-YPF S.A

Economic Instability:
lArgentina has faced historical instability and economic
problems starting from 1907 to 2002
lAs a result of this there was a fluctuation in the
Argentine Jet fuel price
lSuch fluctuation in the price affected the Argentine Air
Force to a large extent since it spends nearly 35% of its
material budget as described earlier

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 Need For Prediction

lInaccurate forecasts over fuel prices can cause major

problem
lAccurate oil predictions are important to improve AAF
budget & logistics planning


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 Research Question

lHow can the Argentine Air Force better predict jet fuel prices to improve
financial & logistic Planning?
l Can jet fuel prices be adequately predicted correctly by using our models?
l What are the necessary variables to introduce in the model to predict jet fuel price in
Argentina?
l What are the necessary data to solve the problem? Are they available?
l Would our model provide a useful planning and decision aid for the Argentine Air
Force?


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 Scope & Limitations

lThe scope of this work is limited to forecasting

Argentine jet fuel prices
l
lModel is not static
l
lModel can be used for current argentine situation only


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 Forecasting Models

lEconometric forecasting
lIntertemporal optimization
lArtificial neural networks
lMultiple regression models

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 Factors affecting Jet Fuel Prices

lCrude oil price

lSupply, demand, production capacity of Jet Fuel
lInflation rate , economic situation
lCauses related to seasonality and natural disaster


lIdentifying predictors
lExpert opinions
lData availability

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 Predictors

1.West Texas Intermediate (WTI)

2.JetKero 54 index (JK 54)
3.Foreign exchange rate (VPD)
4.Argentine Industrial Growth (IG)
5.Consumption Inflation Rate (IR)
6.Price Index of Argentine-Produced Wholesale Goods (IPP)
7.Internal Wholesale Price Index (IPIM)
8.Price Index of Argentine-Produced natural gas and oil (IPP O&G)
9.Argentine Total Jet Fuel Production (TJFP)
10.Argentine Jet Fuel Demand (TJFD)
11.Relation between the Argentine jet fuel demand and Argentine jet
fuel production (RDP)

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 Data collection

lDomestic data
lArgentine Secretary of Energy
lThe Argentine Institute of Statistic and Census
lInternational data
lPlatts, corporation
lTime frame
lMarch 2002 to November 2006
lData cleansing

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 Model

lRegression Model for Jet fuel price (JFP)



 JFP=0.034 + 0.425xJFP(L1) + 0.01xWTI(L1) + 0.00062xIPP(G&O)(L1)

l
lCo-efficient of determination R^2 = 0.98
lMean Absolute Percentage error = 4%
l
l

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 Conclusion

lHow can the Argentine Air Force better predict jet fuel prices to improve
financial & logistic Planning?
l Can jet fuel prices be adequately predicted correctly by using our models?
l What are the necessary variables to introduce in the model to predict jet fuel price in
Argentina?
l What are the necessary data to solve the problem? Are they available?
l Would our model provide a useful planning and decision aid for the Argentine Air
Force?


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 Areas of further research


This case has presented a systematic, statistical approach
to forecast Argentine jet fuel prices


 The model is dynamic in terms of

lChange of predictors
lChange of partial regression co-efficient


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 Summary

lJet fuel is considered an important asset to accomplish

the Argentine Air Force (AAF) missions
lThis case shows that Argentine jet fuel prices can be
accurately predicted through the use of multiple
regression analysis
lForecast in argentine oil industry has served as an
important tool to introduce improvements in budget
and logistic process

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 Reference

lImproving procurement through regression analysis: a case

study of predicting argentine jet fuel prices-Journal of
Public Procurement, 2009 by Salaverry, Juan A, White,
Edward D; Source:http://findarticles.com
/p/articles/mi_7625/is_200901/ai_n32312539/pg_8/?tag=conten
lBMO Commodity Derivatives Group (2005). Hedging Jet Fuel
Purchases. [Online]. Available at
www.bmocm.com/products/
marketrisk/commodity/images/hedgingjetkero_prices
lPlatts, Co. (2006). "Oil Market Information." [Online].
Available at www.platts.com/oil/resources

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