Forecasting Crude Oil Prices By: Keith Cochran Joseph Singh Julio Urenda Dave White Justin Adams

Inquiry: Are Crude Oil Prices Destined to Rise this Summer?

Crude Oil Prices

Economic Background  Oil prices fall due to weak world demand (largely as a result of economic recession in the United States) and OPEC overproduction.  Oil prices decline sharply following the September 11, 2001 terrorist attacks, largely on increased fears of a worldwide economic downturn (and therefore lower oil demand).  Continued unrest in Venezuela and oil traders' anticipation of imminent military action in Iraq causes prices to rise in January and February, 2003.

Economic Significance U.S. highly dependent upon Oil. Price of Crude Oil has direct influence on Gasoline Prices. Higher Oil Prices can create Inflationary pressures/ higher prices of goods and services.

Data Weekly data beginning in January 1997 Data taken from Department of Energy Weekly data captures price fluctuations more accurately Representative of collective OPEC countries

Crude Oil Prices (1997-May, 2004)

First Dickey-Fuller Test ADF Test Statistic % Critical Value* % Critical Value % Critical Value  Accept null hypothesis that there is a unit root. The data is evolutionary.

Data now Stationary

Histogram

Second Dickey-Fuller Test ADF Test Statistic % Critical Value* % Critical Value % Critical Value  Reject null hypothesis that there is a unit root. The sample is now stationary.

Correlogram of dlncrude

ARMA Model

Residual Graph

Histogram

Correlogram of Residuals

Trace of Residual Squared

Correlogram of Residual Squared

ARCH-GARCH Model

Forecast for 1/3/04 to 5/21/04

Forecast for Normal Model

Forecast values for ARCH- GARCH

Forecasting 5/21/04 – 9/03/04

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Conclusions There is an upward trend in oil prices for the Have significant impact on Consumer Price Index (CPI)

Economic Significance of Results Crude Oil Prices are increasing this summer This is largely due to a steady increase in oil demand in the United States and China However, supply disruptions are impossible to predict and could affect oil prices