Slide 7 of 19
- 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 now seem to be correcting, and may even undershoot briefly the prediction based on market fundamentals. That is, as the market perceives a rising probability of excess supplies restoring global inventories to normal levels, traders may tend to disproportionately bid prices down from earlier, exaggerated levels.