What drives crude oil prices?

An A analysis of 7 factors that influence oil markets, l i f f h i fl il k with chart data updated monthly and quarterly

June 15, 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 b i barrel l (real 2009 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

June 15, 2011

World oil prices move together due to arbitrage

dollars per b d ll barrel l real 2009 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 May 2011

June 15, 2011

Crude oil prices are the primary driver of petroleum product prices
price per gallon i ll real 2009 dollars, monthly average 5
Hurricane Katrina shuts down refineries & pipelines

price per b i barrel l real 2009 dollars, monthly average 168 Forecast

Post-hurricane refinery repairs

Unplanned refinery down-time

126

84

2 U.S. retail price of regular gasoline (left axis) refiner acquisition cost of crude oil (right axis) 1 2005

42

0 2006 2007 2008 2009 2010 2011 2012

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

June 15, 2011

Economic growth has a strong impact on oil consumption

percent change (year-on-year) 12 non-OECD liquid fuels consumption q p 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 (June 2011), IHS Global Insight

Forecast

non-OECD GDP

June 15, 2011

Economic growth in Asian economies surprised to the upside in 2007 and 2009 and to the downside in 2008
t th i Asia, l di Japan percent GDP growth in A i excluding J (annual expectations) 12 10 8 6 4 2 0 2007 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 ( g p g ) revised GDP data become available (e.g., 2007 GDP expectations are revised even during 2008).

2007 2008 2009 2010

Source: IHS Global Insight

June 15, 2011

In OECD countries, price increases have coincided with lower consumption

percent change (year-on-year) 6 Forecast 4 90 price per barrel (real 2009 dollars) 135

45

-2 OECD liquid fuels consumption (left axis) WTI crude oil price (right axis) -6 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: EIA Short Term Energy Outlook (June 2011), Thomson Reuters

-45

-4

-90

-135

June 15, 2011

Rising oil prices held down global oil consumption growth from 2005-2008, despite high economic growth
percent change (year-on-year) 6 5 4 3 2 1 0 -1 -2 -3 -4 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: EIA Short Term Energy Outlook (June 2011), Thomson Reuters

price per barrel (real 2009 dollars) Forecast 135

90

45

World liquid fuels consumption (left axis) World W ld GDP (l ft axis) (left i ) WTI crude oil price (right axis)

-45

-90

June 15, 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 2009 dollars) 140 Forecast 105

1.5

1.0 10

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 (June 2011), Thomson Reuters

-70

June 15, 2011

Non-OPEC supply expectations were adjusted upward in 20092010 after production decreased during downturn
million b illi barrels per d l day annual average expectations 53.0 52.5 2 52.0 51.5 51.0 50.5 50.0 50 0 49.5 49.0 48.5 48.0 2008 2009 2010 2011
Source: EIA Short Term Energy Outlook (June 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 t d t move t l d hi h tends to toward th actual realized d the t l li d growth outcome as the year progresses.

2008

2009

2010

2011

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10

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 1 -2 -3 -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 OPEC production targets (left axis) WTI crude oil price (right axis) -80 -60

June 15, 2011

11

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 2009 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

Source: EIA Short Term Energy Outlook (June 2011), Thomson Reuters

June 15, 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 price per barrel (real 2009 dollars) 135 Forecast 90

spare capacity < 2.5 million barrels per day

45

-2 World liquid fuels production capacity* (left axis) World GDP (left axis) WTI crude oil price (right axis)
* World capacity = OPEC capacity plus non-OPEC production

-45

-4

-90

-6 2001 2002 2003 2004 2005 2006

-135

2007

2008

2009

2010

2011

2012

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

June 15, 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 OECD liquid fuels inventory (left axis) WTI crude 12th-1st futures price spread (right axis) -20 2002 2003 2004 2005 2006 2007 2008 2009 2010 dollars per barrel change (year-on-year) 20 15 10 5 0 -5 -10 -15

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

June 15, 2011

14

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)

1,800 1,600 1,400 1,200 , 1,000 800 600 400 200 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Bloomberg

June 15, 2011

15

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

Source: CFTC Commitment of Traders

June 15, 2011

16

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

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Source: CFTC Commitment of Traders

June 15, 2011

17

Crude oil plays a major role in commodity investment

2011 T Target W i ht of th D t Weights f the Dow J Jones - UBS Commodity I d C dit 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

June 15, 2011

18

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

150

100

50

-50 2006 2007 2008 2009 2010 2011

Source: CFTC Special Call Report

June 15, 2011

19

Correlations between daily futures price changes of crude oil 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 N ti l ti Positive P iti correlation l ti Note: Correlations computed quarterly 20

June 15, 2011

Correlations 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 ( ), g ,p 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

June 15, 2011

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June 15, 2011

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