Slide 4 of 11
Notes:
- EIA has quantified this relationship, and this graph shows the results. The graph shows the model as it begins predicting prices in 1992. It shows how well the model has predicted not only the direction, but the magnitude of prices over this 8+ year period.
- While the model is simple and not perfect, it does predict the overall trends and, in particular, the recent rise in prices.
- It also shows that prices may have over-shot the fundamental balance for a while this past fall -- at least partially due to speculative concerns over Mideast tensions, winter supply adequacy, and Iraq’s export policies.
- While prices diverge somewhat from the model results in any given month, they tend to drift back to levels supported by the fundamental supply/demand balance, as movements based on expected behavior can be sustained only if supported eventually by market fundamentals. The important point is that most of the movement or variation in crude oil prices is explained by market forces as represented by relative inventory levels.
