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Key Topics
Requirement
Data Analysis of The Effects of Hurricanes on WTI Crude Oil Prices from 2000-2017
Solution
Introduction
One of the basic and fundamental issues is the prediction of crude oil prices. There have been many mechanisms used for the analysis of the crude oil prices including the single methods and integrated mechanisms. The mechanisms have been developed based on the areas like econometrics, artificial intelligence, statistics and machine learning. But it has been noticed that the predictions did not hold accurate because of the fact that there are certain factors on which the prices of crude oil depend have not been analysed and evaluated intricately (Hamilton 2008). The simple methods have failed to get the right predictions.
From the past results of the researches it has been observed that the methods have failed to get the accurate predictions and the findings of the studies have identified some areas of failure or the reasons behind such failure. United States Energy Information Administration EIA has revealed that the assumptions regarding the factors affecting the crude oil prices have not been considered rightly and that has failed the predictions to go right (Conti et al, 2014). Based on the Gross Domestic Product or GDP the prediction cannot be adequate (oilprice, 2009). There are several other factors which have to be considered. The main aspect of the report is to analyse the impacts of hurricane on the prices of WTI crude oil. In this respect the other important factors have also to be analyzed and evaluated.
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Figure 1: Major Hurricanes from 2000 to 2017 and the WTI Index Variation
Hurricane is one of the irregular events which seems to be imposing serious and severe impacts on the prices of crude oil. The irregular events impact the economy for short term period while the extreme events impact the economy for long term. Changes in OPEC production policy, hurricanes, strikes declared by workforce of oil market are some of the irregular factors (Naifar & Al Dohaiman, 2013). There recession in the global economy, financial crisis, political instability, terrorism, demand and supply pattern of oil and wars are also extreme events which impact the market of oil. It is seen from the discussion that hurricane is not the sole cause of all of WTI crude oil prices and there are certain other extreme events which are also impactful. Hence it is important to include both irregular and extreme events in forecasting the prices of crude oil.
Methodology
The paper has considered the EMD based event analysis method. Empirical Mode Decomposition process of Event Analysis. The data picked for the analysis is of the WTI’s oil price from the period of 2000 to 2017. The entire process of the application of EMD to analyse an event can be described as follows:
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1. Determination of the event of interest- It is the first step that consists of the identification of the specific event of interest and the task of defining the indicators those are to be analyzed such as the time series analysis (Zhang et al, 2009). This indicates the factors those are affected by such events.
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2. Assessing data frequency & analysis window- It is the second step where the determination of the data frequency and the analysis window is made. The frequency is selected on the basis of the event duration, data points those are available those are combined with the time scales bearing significant interests. The analysis window encompasses the window of estimation and the event window. The estimation window can be defined as the periods those do not bear the impacts of the event. The frequency of the data and the window size act together and contain the time scales in respect of the IMFs. As per the Nyquist Sampling Theorem, the biggest cycle that can be extracted from a signal equals one which is not longer than a half of data points (Zhang et al, 2009). So, for the purpose of investigating data with scales those are widely distributed, it is always preferable to have data with high frequency and having a large window size. On the contrary, if a rough scale can be counted, it is possible to use data of low frequency. The data thus determined are then collected and the representations are made graphically.
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3. Decomposition of data by EMD- After there has been adequate understanding of the event initially along with the identification of data the process is to implement decomposition of the time series into a number of IMFs. In respect of data having intermittencies, it can be said that the EEMD is much better than the EMD because it has the capacity to avoid mode fixing.
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4. Analysis of Intrinsic Modes- The first process in this stage is to determine the mode that shows the total change ushered in by the extreme event in the analysis window. Every IMF has a stringent implication that represents a component in the actual time series. The impact of the extreme event is depicted through one or a sum of some IMFs. This particular IMF or the sum of the IMFs can be treated as a prime mode in the analysis (Zhang et al, 2009). The long-term trend and the noises present in the original time series are eradicated and therefore, the actual mode offers a clear analysis of the pattern as well as the magnitude of the change that is caused by the extreme event in the event window.
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5. Analyzing if the effect is temporary or permanent- For understanding this, there is the need to have a longer range of data. It is only in case of a longer period that it is possible to verify a structure breakpoint as a real breakpoint.
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6. Economic Analysis- Here, the conclusions are derived from the analysis of the previous steps. Then there is summarizing of the pattern and the degree of change. After that the relevant economic explanations are offered (Zhang, Xun; Yu, Lean; Wang, Shouyang; Lai, Kin Keung, 2009).
Discussion
Analysis of Demand and Supply: Macro Economy
There has been an overall growth in the world economy as observed to have taken place in the last few years and have potential chances to be continued. OECD group of economies have shown desirable growth in 2017. It has made the growth expectation in the world economy by 3.5% in the year 2017 (Uribe & Schmitt-Grohe, 2017). The growth forecast for 2018 has been kept constant. The growth in GDP of OECD has been revised to maximum 2.2% in 2017 and it has been kept unchanged for the year 2018 when the growth is forecasted to rise up to 2%. The fast growth dynamic in the Euro-zone and in the economy of the United States have raised the expectations for growth.
The economy of US has shown remarkable growth in IH17 and that has compelled to expect there would be further growth and development. The growth in the economy of China has been extremely higher than it has been expected and now it is expected that the growth might reach 6.3% in 2018. In India the economic growth has been highly affected by demonetization and GST (Kirkby, 2018). In India the growth has been forecasted to progress by 7.5% till the end of 2018 mainly because of structural reformation. It has been forecasted depending on the ways Brazil and Russia have been recovering from their economic downturn that there would be a growth in their economy my 1.5% and 0.5% respectively for 2017 and now it has been forecasted that in 2018 there will be growth 1.4% and 1.5% respectively.
The forecasting has considered the developments in the prices of commodities and also the political factors like presidential elections in Brazil and Russia. There are still some hopes for further growth in the global economy in 2018 (Cvetkovich, 2018). But it is also true that there are still some areas of risks of changes in the political situations and monetary decisions and policies which might impact the global economic growth. In equity and bond markets higher valuations coupled with lower volatility can be major challenges for the growth of global economy. The decision of the central banks of lowering the monetary stimulus steps can also be some of the major challenges for the economic growth. The increase in the levels of debts in some of the important economies can also become risks for the economic growth especially in the US economy (Brown, 2018). It is also worth mentioning that the prices of oil and stability in the prices of the commodities are important and essential for the improvements in the global economy.
Global Oil Demand
In the year 2017 OECD America and Europe have performed remarkably well and that has increased the expectations regarding the progress in the global economy. The demand for global oil has been revised to nearly 50tb/d and it is because of the outstanding performance by these two countries. The demand for oil globally has been revised to 1.42mb/d whereas the global consumption of oil has been fixed to at 96.77mb/d. The growth in the global oil demand has been expected to be around 70tb/d in 2018 and the growth is now forecasted to take place by 1.35mb/d and the global consumption is expected to rise up to 98.12mb/d in 2018.
The overall demand for oil in 2017 has been found to be highly rigid especially in the nations like Europe and America (Kilian & Lee, 2014). Data provided by OECD of America showed further growth and development for the coming months. There would be gains from the transportation and industrial sectors which will increase the oil demand (Liu et al, 2015). There has been remarkable increase in the demand for gasoline, LPG, jet fuel and gas diesel oil. The remarkable result in the second quarter of 2017 has impacted the forecasting results for the third quarter. But the catastrophic effects of Hurricane Harvey have declined the demands from the transportation sector in August of 2017.
There have been noticeable economic changes and growth in the sales of vehicles has contributed to the increase in the global oil in the European belt. The declining prices of oil have also contributed to the increase in the demand for oil. In Europe it is expected that the growth of the oil demand would have to be adjusted by 30tb/d for the entire year. Moreover the petrochemical industry of South Korea has been affected by the reducing demand for oil in Japan. But in the global scenario the demand for oil is expected to be increased further by 10tb/d if the overall growth and development in the global economy is to be considered (Lane, 2017).
Global Oil Supply
If the month-on-month basis is considered then it will be seen that there has been decline in the supply of global oil by 0.41tb/d while there has been increase in global oil supply if year-on-year basis is to be considered. There has been a prediction for the growth in the non-OPEC supply of oil because the downward revision in OECD America has offset FSU upward revision. The supply of oil ha increased beyond its expected level because of the remarkable development and growth in the production of oil in Kazakhstan (Lane, 2017). There has been a growth in oil by 0.04tb/d in the year 2017 and there has been a decline in the supply from US by 0.07tb/d for the same year.
Initially it has been noticed that the there has been a decline in the global oil supply by 0.41tb/d in 2017 August to average 96.56mb/d. In August 2017 the supply from non-OPEC supply has also been observed to be lower by 0.33tb/d to average 64.00bm/d. There has been increase in the production of oil in August 2017 in Africa, Ghana, Congo, Canada, Columbia, Norway and in the OPEC US which has been balanced the decline in the production of oil in Azerbaijan, Mexico, China and the United Kingdom. The share of the crude oil being sourced by OPEC has found to be decreased nominally in the month of August 2017 as compared to July of 2017 (Golombek et al, 2018). Secondary sources include the oil production from the non-conventional points.
Demand Supply Balance
The current demand supply of oil trend in the last couple of years has impacted the prediction in demand and supply of the oil. It is expected that in 2018 the OPEC crude oil will be 32.8mb/d which is 0.2mb/d higher than that of 2017. There has been revision in the OPEC crude oil by 0.4mb/d. There have been revisions in the 1st quarter by 0.5mb/d, second quarter by 0.5mb/d and third quarter by 0.6mb/d and finally the fourth quarter revision has been 0.6mb/d. There have been certain changes in the demand and supply of oil for 2017 which has made the estimation for the year 2018 (Golombek et al, 2018).
Impacts of 9/11 attacks 2001
The terrorist attacks of 9/11 2001 has not left any severe impacts on the global economy and that of the US. The oil market has also not been affected much which made the governing bodies to take no proactive measures towards the recovery and to re-establish stability in the energy markets (Holwerda & Scholtens, 2018). The most important World Trade Centre has been adversely affected which had resulted into the closure of New York Mercantile Exchange or Nymex. The participants of the oil market like the oil producers, marketers, refiners and oil traders have to decide for the prices of the oil post 9/11 attacks and massive loss.
The Nymex has been the major place where the trading of crude oil takes place. The price mechanism for the crude oil takes place in Nymex (Burns et al, 2017). In Nymex the prices of the oil are fixed depending on the participants of the oil market and developments in the market and political factors. The participants of oil market use Nymex as their reference for the price mechanism in fixing the current prices of oil and that of the future prices. But the massive attack of 9/11 the participants have to depend on the spot market for fixing the prices of oil. It seemed that the oil market has not been affected to great extent by the closing of Nymex and within a week after the attack the normal mechanism has initiated (Burns et al, 2017).
The analysis window for this event is taken from three months prior to the event and after the three months of event, that is, from June 2001 to December 2001. Prior to going with EMD, rough evaluation of the shock is shown in the figure below for this window.
Figure 2: Figure shows the change in the oil price and the 911 incident
If the figure above can be considered right now then it may be stated that there can be some contribution to the fall in the WTI Oil Price after 9/11 incident. However, it has stayed lower for the next few months. Further assessment may give clearer picture.
The major reason behind the immediate attacks on the market of oil is to increase the oil prices with the help of the interaction between the market forces demand and supply. The amount that the US refiners paid towards the crude oil has decreased in 2001 from $24.44 to $23.73 per barrel and since then there has been sharp decline in the prices of oil. The demand for oil has declined which reduced the prices of oil. The actions as taken by OPEC and Iraq have impacted the price decline and since then a rise in price of oil has been observed. The price of oil has impact on the GDP and the rate of inflation (Ji & Guo, 2015). It can be said that the attacks of 9/11 could not affect the oil price and oil market for any longer time and since October 2001 there has been changes and increase in the prices and demand and supply.
Iraq War of 2003
The Iraq War is one event of interest that continued from the 20th of March 2003 to 1st May 2003 (Kirby, 2014). The event window in this case is the time interval from November 8th 2002 to 1st of May 2003. The war continued for two months but the expectations of the war had begun 6 months before the war actually broke out. Immediately, it has an impact over the prices of the crude oil. The analysis window depicts the period from 1st August 2002 to 31st July 2003. From the figure, it is possible to see the movements of the two price series of the crude oil as depicted in the analysis window.
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