Slide 7 of 30
Notes:
- EIA’s forecasts are based on market fundamentals. One can use a simple model to deal with price/fundamental relationships. This one predicts monthly average WTI price as a function of OECD total petroleum stock deviations from the normal levels .
- 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 -- at least partially due to speculative concerns over Mideast tensions, winter supply adequacy, and Iraq’s export policies.
- Prices moved lower in December, and even undershot briefly the prediction based on market fundamentals at that time. This was due to the market’s perception of a rising probability of excess supplies restoring global inventories to normal levels, causing traders to disproportionately bid prices down from earlier, exaggerated levels.
- While prices diverge somewhat from the model results in any given month, they seem to drift back to where the fundamental supply/demand balance says they will likely be.
