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What Really Controls Oil Prices?

By on 29 Feb 2016 in analysis, notable posts

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(Forbes) World oil prices are controlled by the amount of crude oil stored at Cushing, Oklahoma. That’s because Cushing is the pricing point for WTI (West Texas Intermediate) oil prices, the most-traded oil futures contract in the world.

Cushing Storage Rules World Oil Prices.

WTI (and Brent) oil prices have good negative correlation with the volume of crude oil stored at Cushing. Comparative inventory, the present volume of oil compared with the 5-year average, and oil-price volatility, the rate at which the price of oil moves up and down, are shown in Figure 1. Figure 1. Cushing comparative inventory, oil price and oil-price volatility. Source: EIA & Labyrinth Consulting Services, Inc. (click image to enlarge) From the beginning of 2014 until the end of July, comparative inventory fell and world oil prices were high averaging more than $100 per barrel. From August to the time of the November 28 OPEC meeting, Cushing inventories rose and oil fell below $70. OPEC’s decision not to cut production caused a spike in volatility and prices dropped to $46 per barrel by the end of January 2015.

Prices rose in February based on hope that falling rig counts would bring declining U.S. production. Rising Cushing inventories brought markets back to reality and they fell again in March (Figures 1 and 2). Figure 2. Cushing comparative inventory, WTI price and oil-price volatility. Source: EIA & Labryinth Consulting Services, Inc. (click image to enlarge) Cushing storage fell from mid-April to mid-June 2015 and oil prices rallied to $60 per barrel. Concerns about China’s economic growth and the lifting of sanctions on Iran added to flattening Cushing inventories and oil fell to near $38 per barrel by mid-August.

When inventories fell again in late August, prices increased to almost $50 per barrel and then plateaued until the end of October. Storage had flattened but the outlook for Chinese growth had improved as the People’s Bank of China announced stimulus measures.

From the beginning of November to the end of 2015, comparative inventories increased again and oil prices plunged below $30 per barrel with the near-collapse of China’s stock […]

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