FACTS

WORLD CRUDE OIL MARKETS

NOVEMBER 6, 2014

Some Simple Charts for Complex Times

ANALYST
Martin King

Why You Need to Read This:

+1.403.262.0625 - mking@firstenergy.com

ASSOCIATE
Elaine C. Williams, CFA
+1.403.262.0622 - ecwilliams@firstenergy.com

Making a relative comparison of price downturn episodes for WTI and Brent appears to suggest that a price bottom is put in place after
about 100 to 110 trading days from a relative peak; the current downturn in prices is just reaching 100 trading days from its most recent
peak.

The current downturn in crude oil prices is tame compared to the extreme price meltdown episodes of 1985-86 and 2008-09.
The relative comparisons across previous price downturns would seem to suggest for the current episode that WTI prices will put in a
bottom around US $75 to US $80 per barrel and that Brent prices will put in a bottom around US $80 to US $85 per barrel; in other words,
near current price levels.

If (and thats a big IF) the current downturn in prices is starting to bottom out, then comparative analysis would suggest the relative price

Prepared for Gary Lamphier on November 06, 2014

bottoms will persist for another 30 to 40 trading days, or roughly to the end of 2014; price activity would appear to be very choppy during
this time.
Repeats or Rhymes? The old phrases, history repeats itself or the alternate, history may not repeat itself, but it certainly does seem to
rhyme may hold true for the crude oil market as well. We have plotted some simple comparisons for WTI and Brent crude oil prices comparing the current pullback in prices to previous episodes of price pullback or meltdown. By basing crude oil prices to 100 at the relative peaks
for each of these downturns, we get some sense for the scale and pattern of price pullbacks and can compare and contrast these against the
current price episode.
We are simply plotting what the price data shows us. We make no allowances to adjust for the dozens or hundreds of other factors that
can affect the crude oil markets at any given time. In the purest sense, the price on any given day should reflect the markets assessment of
these factors.
Observations. Based on the charts shown on pages 2 and 3, we believe that we can make three general observations on the behavior of
crude oil prices across recent and previous extreme price downturns:
1. Each downturn in prices, regardless of its severity, appears to be characterized by a bottoming out and rough stabilization for
prices about 100 to 110 trading days after the relative peak; the current downturn in prices is just reaching 100 trading days.
2. The current downturn, despite the mass hysteria and hoopla, bears little resemblance to the extreme price meltdowns of 1985-86
and 2008-09; the current downturn appears to have far more in common with three short-lived previous price downturns of 2011, 2012 and
2013.

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FACTS

WORLD CRUDE OIL MARKETS

NOVEMBER 6, 2014

Some Simple Charts for Complex Times

3. Every pricing cycle is
unique in terms of market structure, supply and
demand dynamics, regulatory environment, and
investor sentiment, but
our simple comparisons
seem to suggest general
relative similarities for
pricing action across
downturns.

Figure 1: Nymex Front Month WTI Crude Oil

US $/bbl
$150
$135
$120
$105

Figure 2: Comparison of 1985-1986, 2008-09 and 2014

WTI Crude Oil Price Meltdowns
1985-86 Meltdown
2008-09 Meltdown
2014 Meltdown

100
90

$90

80

$75

70

$60

60

$45

50

$30

40

$15

30

$0

20

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

WTI Extremes. The cur- Source: FirstEnergy Capital Corp., Bloomberg.

rent pullback in WTI
prices is tame compared to the two big meltdowns of 1985-86 and 2008-09
(Figure 1). The current pullback (Figure 2) has been about 30% nearly 100 trading
days after the previous peak (pegged on June 19, 2014). That compares to losses
of 60% to 70% in the two previous extreme episodes. In the two extreme cases,
price losses tended to shallow out and begin a choppy period of stabilization after
about 100 days from their relative peaks.

(Peak price in each episode set to 100)

110

16

Source: FirstEnergy Capital Corp.

31

46

61
76
91
106
Days After Peak Price

121

136

151

Figure 3: Comparison of 2011, 2012, 2013 and 2014

WTI Crude Oil Price Downturns
105

(Peak price in each episode set to 100)

100
95
90
85

Prepared for Gary Lamphier on November 06, 2014

80

More Recent WTI Episodes. We have indentified three episodes in recent years
75
2011 Downturn
2012 Downturn
70
with big downward swings coming in 2011, 2012 and 2013. We have plotted
2013 Downturn
65
similar charts and included the current 2014 episode (Figure 3). Obviously, the
2014 Downturn
60
downturns on a relative basis were nowhere near the extremes seen in 1985-86
1
16
31
46
61
76
91
106 121 136 151
and 2008-09, but what is interesting to note is that regardless of the episode, all of Source: FirstEnergy Capital Corp., Bloomberg.
Days After Peak Price
the price declines effectively bottomed out around 100 to 110 trading days after
their relative peaks. The upside from that point was choppy, but a bottom was found nevertheless. Again, the current pullback has reached
nearly 100 days since its relative peak in June.
Brent Extremes. We have plotted the extreme price meltdown of 2008-09 for Brent prices (Brent did not begin trading until June 1988) and
the current price pullback episode (Figures 4 and 5). As in the case of WTI, the current pullback is fairly tame compared to that prior episode,
but may also be getting close to the bottom on a relative basis.
More Recent Brent Episodes. The current price pullback episode when compared to the 2011, 2012 and 2013 price pullbacks for Brent is
certainly very choppy (Figure 6), but has similar characteristics to the three previous episodes. After about 100 trading days, the same patRegulatory Disclosures and our policy on the dissemination of research can be found at http://www.firstenergy.com/research/regulatory-disclosures

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FACTS

WORLD CRUDE OIL MARKETS

NOVEMBER 6, 2014

Some Simple Charts for Complex Times

tern of choppy price
action begins in
2011, 2012 and 2013,
but price bottoms
were essentially in
place.
Why Would the
Relative Price Cycles Look Similar?
We put forward some
potential answers as
to why this may be
the case:

Figure 4: ICE Front Month Brent Crude Oil

Figure 5: Comparison of 2008-09 and 2014 Brent Crude

Oil Price Meltdowns

US $/bbl
$150

110

$135

100

$120
$105

80

$90

70

$75

60

$60

50

$45
$30

40

$15

30
20

$0
1988

2008-09 Meltdown
2014 Meltdown

90

1991

1994

1997

2000

2003

2006

2009

2012

2015

Source: FirstEnergy Capital Corp., Bloomberg.

1. Investor flow of dollars out of the crude oil space eventually reaches a point of
exhaustion where most long positions have closed out and most short positions
have covered, leaving little interest to buy or sell, creating some stability for
prices.

16

31

46

Source: FirstEnergy Capital Corp., Bloomberg.

61
76
91
106
Days After Peak Price

121

136

151

Figure 6: Comparison of 2011, 2012, 2013, and 2014

Brent Crude Oil Price Downturns
105
100
95

Prepared for Gary Lamphier on November 06, 2014

90

2. A cycle of around 100 trading days would exceed that of more than one calendar quarter, allowing investors to reposition out of the crude oil investment
space and toward other investments for subsequent quarters to hopefully
achieve better returns in other investment categories.
3. Prices in each episode may have reached such a point, though not readily
identifiable at the time, where marginal costs of production have been reached
for the most relevant production streams that might be affected by the price
downturn (perhaps U.S. shale oil in the current case?).

85
80

2011 Downturn
2012 Downturn
2013 Downturn
2014 Downturn

75
70
65
60
1

16

31

Source: FirstEnergy Capital Corp., Bloomberg.

46

61
76
91
106
Days After Peak Price

121

136

151

4. Prices reach a low point where geopolitical risks to production have been effectively discounted to zero (or less) and further price losses
are not reasonable or sustainable.
5. Prices have reached the point, though not readily identifiable at the time, where previously marginal demand sources return to the market
with greater force.
6. Seasonal factors, such as refining activity, begin to take hold after more than one quarter and the demand for crude oil rises.

Regulatory Disclosures and our policy on the dissemination of research can be found at http://www.firstenergy.com/research/regulatory-disclosures

Page 3 of 4

FACTS

WORLD CRUDE OIL MARKETS

NOVEMBER 6, 2014

Some Simple Charts for Complex Times

There are probably many others that we cant think of, but these seem like credible starting points to describe the relative similarities in pricing action across different episodes.
Are We Reaching the Bottom for Prices in the Current Cycle? The relative price performance chart analysis would seem to suggest that
we are close to a bottom for both WTI and Brent prices, although there is never any guarantee, of course. However, throwing out a guess
would seem to suggest a low for WTI around US $75 to US $80 per barrel and around US $80 to US $85 per barrel for Brent. In other
words, a bottom for prices near current levels.
If these suggested price levels do indeed prove to be the lows in the current cycle, then past relative historical performance also suggests
that these general lows will persist for around another 30 to 40 trading days, or roughly to the end of this year before improvement
is seen. In making these very general statements, we make no allowance for the known unknowns such as the outcome of the Iran nuclear negotiations with the latest deadline set for November 24 and the outcome of the upcoming OPEC ministerial meeting on November 27.
These two events could swing investor sentiment toward crude oil to yet another extreme or have no impact at all.

Prepared for Gary Lamphier on November 06, 2014

Conclusions. All of the episodes we have plotted had unique circumstances, as do all pricing cycles. However, they do seem to have some
common dynamic relative threads in terms of the length of price downturns (about 100 to 110 days from peak), and the magnitude of extreme events (1985-1986 and 2008-09) does not match the current price downturn for either Brent or WTI in terms of its severity. We would
hazard a guess that the current price downturn episode is unlikely to do so given the nature of what was happening during those extreme
pricing episodes (Saudi opening the taps in 1985-86 from a very low production base; 2008 financial crisis and global equity crash). In the
absence of major global crises to materialize in the next few months (always fraught with uncertainty), then the current downturn for
crude oil prices may have largely run its natural course.

Regulatory Disclosures and our policy on the dissemination of research can be found at http://www.firstenergy.com/research/regulatory-disclosures

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