Michael Ye

Forecasting crude oil spot price using OECD petroleum inventory levels

This paper presents a short-term monthly forecasting model of West Texas Intermediate crude oil spot price using OECD petroleum inventory levels. Theoretically, petroleum inventory levels are a measure of the balance, or imbalance, between petroleum production and demand, and thus provide a good market barometer of crude oil price change. Based on an understanding of petroleum market fundamentals and observed market behavior during the post-Gulf War period, the model was developed with the objectives of being both simple and practical, with required data readily available. As a result, the model is useful to industry and government decision-makers in forecasting price and investigating the impacts of changes on price, should inventories, production, imports, or demand change.

Elasticity of demand for relative petroleum inventory in the short run

To better understand petroleum markets, the authors established the importance of the deviation of inventory levels away from a normal level, where the normal level is comprised of seasonal movement and a general trend. Since supply and demand for petroleum are less elastic to price in the short run than is inventory, it is this deviation or relative inventory level that plays the role of absorbing unexpected shifts in demand and supply. They demonstrated theoretically that the demand for relative inventory must be negatively related to price. They estimated the relative inventory levels and associated short-run price elasticity for several OECD countries and groups of countries, and found that short-run price elasticity of demand for relative inventory is negative and statistically significant, supporting the theoretical arguments.