Impacts of supply and demand
factors during oil price falls
Myung Suk Kim
Sogang University
IAEE 2017 Singarpor Conference
Motivation
• Extraordinary oil price falls twice; from 2008 to 2009 and from 2014
to 2016
During these, the oil prices became a half.
• What cause these extreme events in term of the supply and
demand based price decision mechanism
2
Literature Review
Previous studies regarding the impact of supply and demand
factors on oil prices
Kilian, L., 2009. Not all oil price shocks are alike: disentangling demand
and supply shocks in the crude oil market,” American Economic Review 99,
1053–1069.
Kilian, L., Hicks, B., 2013. Did unexpectedly strong economic growth cause
the oil price shock of 2003-2008? Journal of Forecasting 32, 385-394.
Panopoulou, E., Pantelidis, T., 2015. Speculative behavior and oil price
predictability. Economic Modelling 47, 128-136.
3
Design of Study
• Demand factors in the oil markets are categorized into the real
demand (S&P, OECD industry index, China stock index, India stock
index) and strategic demand (US Strategic Petroleum Reserve)
• Supply factors are OPEC production and Shale oil development
• Oil prices of West Texas, Brent, Dubai are response variables
• Monthly observations were utilized due to data availability
4
Design of Study (continue…)
• Log-transformed lag-differenced time-series regression models were
evaluated in the aspect of monthly updated out-of-sample
forecasting performances
• 2008 Fall: initial in-sample (2005.01~2008.05)
out-of-sample (2008.06~2009.02)
• 2014 Fall: initial in-sample (2011.03~2014.05)
out-of-sample (2014.06~2016.02)
5
Model
• A full model
 ln( Pt )   ln( Dtr )   ln( Dts )   ln( St )   t
• Variables
Pt : oil price
Dtr : real demand
Dts: strategic demand
St
: supply factor
• Model validation check: Engel-Granger Co-integration test
6
Model (continue…)
• M1: real demand (SNP, India, China, OECD)
• M2: real demand + strategic demand (SPR)
• M3: real demand + supply (opec or shale)
M3-1: w/ opec
M3-2: w/ shale
• M4: real demand + strategic demand + supply
M4-1: w/ opec
M4-2: w/ shale
7
Empirical results
 2008 prediction error (RMSE/ MAPE)
2008
Texas
RM SE
M APE
M1
Brent
RM SE
M APE
RM SE
M2
M APE
Dubai
RM SE
M1
M APE
M2
RM SE
M APE
RM SE
M1
M APE
M2
snp
13.090
10.273
13.489
10.374
12.596
9.984
12.892
9.997
11.899
8.814
12.113
8.945
India
12.116
10.119
12.107
12.107
12.124
10.098
12.037
9.886
11.396
8.966
11.366
8.794
China
12.013
10.087
11.763
9.793
12.341
10.077
11.983
9.777
11.441
8.951
11.176
8.707
Oecd
10.569
7.894
10.105
7.440
11.543
8.904
10.893
8.285
10.669
8.056
10.179
7.324
M 3-1
M 3-2
M 3-1
M 3-2
M 3-1
M 3-2
snp
13.310
10.605
16.087
12.473
13.005
10.515
14.781
11.706
11.981
8.902
14.336
10.667
India
12.291
10.414
16.190
12.450
12.440
10.553
14.823
11.766
11.470
9.050
14.652
10.515
China
12.173
10.367
16.427
11.929
12.565
10.500
15.226
11.133
11.514
9.030
15.018
10.769
Oecd
10.641
8.063
15.977
10.965
11.568
9.020
15.958
11.030
10.696
8.093
15.413
11.140
M 4-1
M 4-2
M 4-1
M 4-2
M 4-1
M 4-2
snp
13.647
10.513
14.312
11.138
13.285
10.457
13.812
10.649
12.201
9.034
13.826
10.241
India
12.212
10.121
15.124
12.312
12.304
10.263
13.455
11.082
11.418
8.863
13.545
10.271
China
11.876
10.012
14.895
12.098
12.198
10.130
13.278
10.720
11.234
8.775
13.139
10.205
Oecd
10.167
7.579
14.312
11.137
10.982
8.395
13.609
10.380
10.215
7.411
13.233
9.504
8
Empirical results (continue…)
 2014 prediction error (RMSE/ MAPE)
RM SE
M APE
Dubai
Brent
Texas
2014
RM SE
M APE
RM SE
RM SE
M APE
RM SE
M APE
RM SE
M APE
M2
M1
M2
M1
M2
M1
M APE
snp
5.895
4.637
5.940
4.692
6.312
5.070
6.343
5.123
6.308
4.941
6.329
4.985
India
6.102
5.034
6.162
5.136
6.862
5.673
6.899
5.721
6.820
5.492
6.851
5.534
China
6.075
5.078
6.106
5.110
6.928
5.837
6.946
5.859
6.769
5.557
6.779
5.571
Oecd
6.182
5.080
6.211
5.187
6.831
5.725
6.868
5.786
6.805
5.543
6.829
5.588
M 3-1
M 3-2
M 3-1
M 3-2
M 3-1
M 3-2
snp
5.863
4.524
6.031
4.546
6.150
4.877
6.354
4.899
6.100
4.679
6.340
4.798
India
6.046
4.968
6.222
4.994
6.674
5.490
6.827
5.425
6.594
5.255
6.794
5.250
China
6.004
4.970
6.239
5.077
6.713
5.600
7.005
5.688
6.496
5.249
6.821
5.429
Oecd
6.178
5.076
6.272
5.064
6.651
5.520
6.775
5.546
6.576
5.289
6.717
5.379
M 4-1
M 4-2
M 4-1
M 4-2
M 4-1
M 4-2
snp
5.915
4.584
6.063
4.566
6.185
4.942
6.375
4.885
6.126
4.735
6.351
4.787
India
6.122
5.089
6.272
5.060
6.726
5.552
6.855
5.464
6.637
5.310
6.808
5.282
China
6.052
5.021
6.259
5.050
6.748
5.638
7.015
5.698
6.523
5.282
6.822
5.436
Oecd
6.215
5.193
6.272
5.066
6.703
5.598
6.791
5.539
6.613
5.352
6.720
5.372
9
Conclusion
• During 2008 fall, real demand and strategic demand played an
important role
• During 2014 fall, real demand and OPEC production were important
• Unlike 2008 fall, Shale oil development played a significant role
during 2014, but OPEC production was still more important
• During 2008 fall, OECD played the most important role in M2, where
China and India were more important than SNP
• During 2014 fall, the SNP played the most important role in M3-1
10
Thank you!