Crude Oil Production & PriceJon LaidlawLewis University Graduate School of Management

Global Supply and Demand for

Crude

“In the long run, oil is about as purely elastic a commodity as there is,

every movement on the production and consumption sides is reflected

in the price.” –(Investopedia, 2015)

United States overtakes Russia as world’s largest oil and natural-gas

producer in 2015

“Implications of the shale revolution for the U.S. are profound.”

Allowing the world’s largest economy to reduce imports, contributing to the slump in global energy prices

Oil Producing Nations (EIA, 2013)

OPECThe organization of Petroleum Exporting Countries

Established 1960, Baghdad Conference by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela

Later joined by nine others: Qatar (1961), Indonesia & Libya (1962), United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), and Gabon (1975)

Source: OPEC.org

The bottom falls out

In 2014, OPEC producers continually increase output while facing pressure from increasing U.S. shale production, resulting in global oversupply. Crude prices begin to drop.

Domestic Crude Oil Production

Data

Rig count: Baker Hughes; U.S. total rig count

Total Crude Production: EIA Weekly Petroleum Status Report

WTI Price: Federal Reserve (FRED)

West Texas Intermediate; spot price

U.S. benchmark (Global benchmark: Brent Crude)

0.00

20.00

40.00

60.00

80.00

100.00

120.00

0

2000

4000

6000

8000

10000

12000

1 5 9

13

17

21

25

29

33

37

41

45

49

53

57

61

65

69

73

77

81

85

89

93

97

10

1

10

5

10

9

11

3

11

7

12

1

12

5

12

9

13

3

13

7

14

1

14

5

14

9

15

3

15

7

WTI Price vs. Rig Count & Production

Rig count Production WTI Price

A Simple Model: Predicting the

Price of WTI Given Two InputsSUMMARY OUTPUT

Regression Statistics

Multiple R 0.86859

R Square 0.75445

Adjusted R Square 0.75132

Standard Error 11.25547

Observations 160

ANOVA

df SS MS FSignificance

F

Regression 2 61111.04 30555.52 241.19 0.0000

Residual 157 19889.65 126.69

Total 159 81000.69

CoefficientsStandard

Error t Stat P-value Lower 95%Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 124.0594 12.6744 9.7881 0.0000 99.0250 149.0938 99.0250 149.0938

Rig count 0.0379 0.0031 12.1423 0.0000 0.0317 0.0440 0.0317 0.0440

Production -0.0107 0.0012 -8.8485 0.0000 -0.0131 -0.0083 -0.0131 -0.0083

We Can Now Derive a Formula for

The Price of Crude

Price(WTI) = 124.059 + 0.038*RigCount – 0.011*TotalProduction

A simple hypothetical, given data from 11/20/2015:

Rig count: 564

Total Production: 9165

Price(WTI) = 124.059 + 0.038*564 – 0.011*9165

= $44.676

What was the spot price of WTI on 11/20/15?

$41.54

Our Model was Fairly Accurate!

We can probably construct a better model!

Data set included more inputs that we could use as predictors

Run regression to see if we can create an even better model

Net Imports

Stock Change

Refinery inputs

Crude Oil Stocks

Links to references

U.S. Ousts Russia as Top Oil & Gas Producer (Bloomberg, 2015)

Oil Price Analysis: The Impact of Supply & Demand (Investopedia)

Wikipedia: List of countries by oil production

Data from GitHub

Weekly data from November 2012 – December 2015

Questions?

Thanks!