dr. behrooz abdolvand. 1. demand side arguments imbalance of supply and demand increased demand...
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What Drives the Oil Price?
Dr. Behrooz Abdolvand
The Rise And Fall of Oil Prices
1. Demand side arguments Imbalance of supply and demand Increased demand due to emerging markets (China,
India) Therefore OPEC has to increase production Peak Oil (demand outweighs supply) Scarce reserves
2. Supply side arguments Hoarding by OECD countries Speculation Dollar devaluation
Common Explanations for the High Oil Price
Increasing Energy Commodity Prices
Parallel increase of supply and demand
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Produktion
3170.41990599442
3160.50745967752
3190.14402298357
3188.88653774493
3237.38274986747
3281.3285946768
3377.10365961135
3479.93720459129
3547.25444105904
3481.14409834541
3614.08893308808
3600.29405002411
3575.34620273224
3701.06058286264
3866.6672792223
3897.04843379505
3914.30471512478
3905.93667323681
Verbrauch
3154.92250074574
3149.06407629726
3186.26841329224
3162.85264298882
3218.61053089997
3264.22320920861
3346.62855108396
3433.27858100828
3449.32019395667
3518.10760894825
3558.72365416522
3576.17799565385
3611.27066218368
3681.75174672425
3823.72776531711
3871.02088028602
3910.88425426901
3952.82069229712
3100
3300
3500
3700
3900
Parallel development of production and consumption
OPEC - Production capacity
Increasing Prices – Growing Reserves
1990 1995 2000 2005 2006
100000
110000
120000
130000
140000
150000
160000
170000
180000
135734 136890 139626
175384178743
1990
1990
1991
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2001
2001
2002
2003
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2006
2007
2008
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Hoarding can be one of the reasons for price increases
Jan-
2000
Apr-2
000
Jul-2
000
Oct
-200
0
Jan-
2001
Apr-2
001
Jul-2
001
Oct
-200
1
Jan-
2002
Apr-2
002
Jul-2
002
Oct
-200
2
Jan-
2003
Apr-2
003
Jul-2
003
Oct
-200
3
Jan-
2004
Apr-2
004
Jul-2
004
Oct
-200
4
Jan-
2005
Apr-2
005
Jul-2
005
Oct
-200
5
Jan-
2006
Apr-2
006
Jul-2
006
Oct
-200
6
Jan-
2007
Apr-2
007
Jul-2
007
Oct
-200
7
Jan-
2008
Apr-2
008
400000
600000
800000
1000000
1200000
1400000
1600000
1800000
Gesamtbestände Strategische Reserve
US oil stocks (´000 bbl)
Number of ships used for oil storage
Future Contracts and the Oil Price
0
20
40
60
80
100
Gehandelte Futures-Kontrakte in Mio. Stück
US$/b; Futures Sorte WTI
Intense correlation between oil price and futures
Oil: Price development and number of traded contracts
Trade volume by now 2000 times higher than the production amount
General Trend of Commodity Investments
This trend is apparent in all natural resoures
S&P GSCI breakdown by sector – the most popular commodity index is energy-dominated
ETF-Securities: Amount of capital held by oil funds
The development of the oil price and the capital influx into the ETFS-Oil-Funds
ETF-Securities: Amount of capital held by oil funds
Historic correlation between the „New Economy“ bubble and the oil bubble
Negative correlation between oil and the USD
Euro/Dollar Exchange Rate and Oil Price Growth
3/1/
2000
3/4/
2000
3/7/
2000
2/10
/200
0
1/1/
2001
2/4/
2001
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2001
1/10
/200
1
31/1
2/20
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1/4/
2002
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2002
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/200
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2/20
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/200
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/200
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/200
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/200
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/200
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/200
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/200
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/200
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/200
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/200
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/200
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/200
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/200
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/200
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/200
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24/1
2/20
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/200
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23/6
/200
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0
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0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
Öl/WTI Euro/USD
Illustration of correlation not only in the oil sector, but also commodities in general
Monetary Policy causes Dollar Devaluation
Historical Process of Dollar Devaluation
Calculation of cumulative inflation illustrates the current value of the dollar
Nominal and Real Price of Crude 2008
Nominal and Real Price of Crude 2007
Nominal price 2007: ca. 93 $Nominal price 2007: ca. 93 $
Nominal Oil Price 2006
Nominal price 2006: ca. 88 $Nominal price 2006: ca. 88 $
From a historical perspective, multinational oil companies dominated the industrial promotion of energy resources in the Middle East and South America up until the 1950’s. Until the early 1970’s, the trade of oil was based on the “Posted Price”, which large mineral oil corporations collectively set; the fees exacted from this “Posted Price” ultimately determined the size of the state budget of the respective countries. As the oil-producing nations increasingly realized how high the profits were from the contributions of the shareholders, they demanded and even higher percentage. The oil corporations, in turn, attempted to decrease the “Posted Price” in order to protect themselves from the consequences of higher demands and to secure their own revenues.
List Price (Posted Price)
In response, OPEC was founded by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela in 1960, which later expanded to include Algeria, Libya, Nigeria, Indonesia, Qatar, and the United Arab Emirates. OPEC was initially founded in order to unify and coordinate members' petroleum policies and to protect against oil price declines and decreases in oil revenues.
The establisment of OPEC
Consequently, OPEC controlled the oil market and price formation from 1973 until the beginning of the 1980’s. The “Posted Price” was initially replaced by the “Government Selling Price”, which was set by the governments of oil producing states. Later, it was substituted by the “Official Selling Price”, whose price was determined by national oil companies.
Government Selling Price/ Official Selling Price
In light of the decrease in oil demand during the mid 1980’s, many OPEC countries were guaranteed a fixed margin of payment in order to secure oil sales; this fixed margin would then have to be transferred to the oil refineries. The price risk was assumed by the so-called “Net back” conditions of oil producing states. The producer states provided the refineries with crude oil and received a percentage of the profits derived from the sale of refined oil minus a margin of profit that remained for the refineries.
Net back
This process, which removes the price risk from the producer and guarantees a margin of profit, led the refineries to increase production levels. This, in turn, tightened competition. Consequently, the price of products declined and the price of crude oil sank to about $10 a barrel within a very short period of time.
Price decline as a consequence of „Net Back“
This induced the OPEC states to introduce production quotas. They curtailed the oil supply and divided the oil output among the member states in order to achieve price stability.
Quota regulation/Price increase
The oil trade had to re-structure itself. Initially, the trade was handled through spot markets. Later ensued-as a reaction to the oil price fluctuations caused by the limited quota discipline of OPEC-the futures market. The oil futures trade served to limit price risks for oil dealers, but also drew the participation of new groups to the international oil futures market.
Futures market
Under this system, the price of the delivered petroleum (for instance West Texas Intermediate (WTI), Brent or Dubai-Oman) orients itself toward the average price of futures markets of the previous month. The WTI generally serves as the benchmark for oil that is sold to North America, Brent Oil for the sale to Europe and Africa and Dubai-Oman for petroleum that is sold in the Asian-Pacific market.
Formula pricing
Based on this mechanism, there will surely be attempts made by OPEC to regulate prices. A triangle will remain between the futures markets, the consumers and OPEC in the future.
The future oil market will not be a producer market, but rather, a consumer market.
Concluding remarks
Thank you!
Questions?