1. Oil Price Regimes: Why DO Prices Stray from market fundamentals?
Robert K. Kaufmann
Project Link
September 5, 2018

2. since we last met…

3. The Forecast..
$51.80: 2018
$51.75
$50.17
$43.41

4. Do Regime changes cause models to fail?
A long sample period 1938:1 – 2016:4
Market fundamentals
Cointegration
Variables are statistically significant
Price adjusts to disequilibrium
Regime changes
A saturation indicator approach (gets)
Steps
Impulses

5. Market Fundamentals DOLS DOLS & Saturation indicator Z statistic
DOLS
DOLS & Saturation indicator
Z statistic
Cointegrating Relation
Constant
1.61E+02***
1.58E+02***
1.59E-01
𝑈𝑡𝑖𝑙 𝑇𝑅𝐶 2
4.45E-03***
1.93E-03***
3.64***
𝑈𝑡𝑖 𝑙 𝑂𝑃𝐸𝐶
1.28E+02***
3.33E+01***
4.09***
𝐷𝑎𝑦𝑠
-4.47E-01***
-3.47E-01***
-6.90E-01
𝑈𝑡𝑖𝑙 𝑅𝑒𝑓
-3.04***
-1.81***
-3.48***
Error Correction Model 𝜌
-1.08E-01*
-2.11E-01*
1.06
First call on putting new oil into the market
Accept lower spare capacity
Use money elsewhere
Coefficients and test statistics are statistically significantly different from zero at the: **1%, *5%, +10% level

6. Steps & Impulses Value Steps 1947:3 -13.83*** 1949:4 11.00*** 1957:3
Value
Steps
1947:3
-13.83***
1949:4
11.00***
1957:3
-9.58***
1970:3
-11.31***
1974:1
22.69***
1979:2
30.94***
1980:4
-37.45***
2004:3
29.64***
2007:4
28.47***
2008:4
-62.26***
2009:2
40.13***
2011:2
14.14***
2014:4
-42.44***
Impulse
2008:2
36.39***
Steps & Impulses

7. Regimes
Regime 1

8. Atttributing REgimes Start End Cause Regime 1 1947:3 1949:3
Start
End
Cause
Regime 1
1947:3
1949:3
Rationing and price suppression
Regime 2
1957:3
1970:2
New tanker technology
Regime 3
1970:3
1974:1
OPEC gains control over domestic resources
Regime 4
1979:2
1980:3
Panic buying after the Iranian Revolution
Regime 5
2004:3
2007:3
Reallocation of quotas for OPEC members
Regime 6
2007:4
2008:3
Speculation
Regime 7
2009:2
2011:1
Regime 8
2011:2
2014:3
Arab Spring

9. “Missing” Oil Price REgimes

10. Regime 3 (-$11.31)

11. Regimes 6 & 7 Speculation Regime 6 (2007:4 – 2008:3 ) $28.47 Step
$36.39 impulse 2008:2.
Rex Tillerson, then CEO of Exxon Mobil states “I cannot explain why we have $70 oil. The fundamentals behind supply and demand do not support $70 oil. The fundamentals support something much less.”
Regime 7 (2009: :1 )
$ Step
Oil minister of Saudi Arabia. “It has not been fundamentals for a while” (PIW, Sept 14, 2009).
market analysts forecast nominal prices to average $50 during 2009 ($42 to $57) (PIW, March 24, 2009). Even as prices move beyond this range in March 2009, analysts expect it is temporary because “There is little in fundamental to support prices (PIW March 24, 2009).

12. Stories About Speculation

13. Speculative Transfers
$149.1 billion US consumers to US oil producers
$289.6 billion US economy to oil exporting nations

14. Regime 8 2011:2 – 2014:3 $14.41 Arab Spring Libya SPR Release
Ends with 2014 price collapse
Tight oil
Squeeze
Accommodate

15. Who is Responsible for Regimes?
Demand side
Rationing
Panic buying
Supply side
OPEC quotas
Market governance
Speculation
Property Rights

16. The Forecast

17. Oil Prices & Tight Oil
657 barrels per rig, the CVAR model simulates an equilibrium price for oil of about $33 per barrel, which is about $83