What drives crude oil prices?

An analysis of 7 factors that influence oil markets,

with chart data updated monthly and quarterly

March 6, 2018 | 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

Global financial collapse

OPEC production
Low spare quota unchanged
capacity
Iran-Iraq War
U.S. spare Saudis abandon 9-11 attacks
capacity swing producer role
exhausted

Asian financial crisis

Iranian OPEC cuts targets

revolution 4.2 mmbpd
OPEC cuts targets
Arab Oil Embargo Iraq invades Kuwait 1.7 mmbpd

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

March 6, 2018 2
World oil prices move together due to arbitrage

Sources: Bloomberg, Thomson Reuters

March 6, 2018 3
Crude oil prices are the primary driver of petroleum product
prices

Sources: EIA Short Term Energy Outlook, Thomson Reuters

March 6, 2018 4
Economic growth has a strong impact on oil consumption

Sources: U.S. Energy Information Administration, IHS Global Insight

March 6, 2018 5
Changes in expectations of economic growth in can affect oil
prices

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
revised GDP data become available (e.g., 2008 GDP expectations are revised even during 2009).
Source: IHS Global Insight

March 6, 2018 6
In OECD countries, price increases have coincided with lower
consumption

Sources: EIA Short Term Energy Outlook, Thomson Reuters

March 6, 2018 7
Rising oil prices held down global oil consumption growth from
2005-2008, despite high economic growth

Sources: EIA Short Term Energy Outlook, Thomson Reuters

March 6, 2018 8
Changes in non-OPEC production can affect oil prices

Sources: EIA Short Term Energy Outlook, Thomson Reuters

March 6, 2018 9
Non-OPEC supply expectations indicate changes in market
sentiment concerning oil supply

Note: Starting in January of each year, each line shows the

expected forecast of non-OPEC supply for the specified calendar
year, which tends to move toward the actual realized supply
outcome as the year progresses.

Sources: EIA Short Term Energy Outlook

March 6, 2018 10
Changes in Saudi Arabia crude oil production can affect oil prices

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

March 6, 2018 11
Unplanned supply disruptions tighten world oil markets and push
prices higher

Sources: U.S. Energy Information Administration

March 6, 2018 12
During 2003-2008, OPEC’s spare production levels were low,
limiting its ability to respond to demand and price increases

Sources: EIA Short Term Energy Outlook, Thomson Reuters

March 6, 2018 13
The years 2003-2008 experienced periods of very strong economic and oil
demand growth, slow supply growth and tight spare capacity

Sources: EIA Short Term Energy Outlook, Thomson Reuters

March 6, 2018 14
Inventory builds go hand-in-hand with increases in future oil
prices relative to current prices (and vice versa)

Sources: EIA Short Term Energy Outlook, Thomson Reuters

March 6, 2018 15
Open interest in crude oil futures grew over the last decade as
more participants entered the market

Source: Bloomberg

March 6, 2018 16
Physical participants’ (producers, merchants, processors, and end users) U.S.
futures market contract positions

Source: Commodity Futures Trading Commission, Commitments of Traders

March 6, 2018 17
Money managers tend to be net long in the U.S. oil futures
market

Source: Commodity Futures Trading Commission, Commitments of Traders

March 6, 2018 18
Crude oil plays a major role in commodity investment

Source: Bloomberg

March 6, 2018 19
Commodity index investment flows have tended to move
together with commodity prices

* Note: CFTC discontinued the collection of index investment data in November 2015.

Source: Bloomberg, Commodity Futures Trading Commission (CFTC)

March 6, 2018 20
Correlations (+ or -) between daily price changes of crude oil
futures and other commodities generally rose in recent years

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Natural Gas 000101000111000000001100000000#0000000000#0000#0000000000000
Gold 00#00000000001000001110000101#01110100000000#000#000###000#0
Copper #0#00000#00#010000001011011111010111111001000#01000010000000
Silver 00#0000#000001000001110000111000010100000000#000000000000000
Soy #0#0#0#000000000000010110100000000100000#00#00#0000000000000
Corn #0##000#000000000#001001100100#000000000#0#000#00000#0000000
Wheat 00#0000#0000#0001##00000110100000000000#####0#0#0000#0000000

< -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
Note: Correlations computed quarterly

March 6, 2018 21
Correlations (+ or -) between daily returns on crude oil futures
and financial investments have also strengthened

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
S & P 500 ####00###0#000#0000#0#0001101111#111011001000000000010000##0
U.S. Dollar ###############0##0#######################0#######0#0##0##0#
U.S. Bonds 0000#000#00#00###0#0#0#####################0##0#########0##0
WTI Implied Volatility 0##0#00#000#0#0####000##########0#########0##0##############
Inflation Expectations 000#0000000011000000101#0000010001100100#100000001101110000#

< -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

Note: Correlations computed quarterly

March 6, 2018 22
For more information
U.S. Energy Information Administration home page | www.eia.gov

Short-Term Energy Outlook | www.eia.gov/steo

Annual Energy Outlook | www.eia.gov/aeo

International Energy Outlook | www.eia.gov/ieo

Monthly Energy Review | www.eia.gov/mer

EIA Information Center

(202) 586-8800 | email: InfoCtr@eia.gov

March 6, 2018 23