ANALYSIS OF OIL MARKET CRASH

Marshall Chang

Price of Oil

Generally refers to the spot price of a barrel of benchmark crude oil

Brent and WTI

Brent Crude: Major trading classification, worldwide bench mark price, low density low surfer, “light sweet”, ICE since 2005, North Sea, refined in Northwest Europe

WTI: West Texas Intermediate, “Texas Lighter Sweeter”, NYMEX, Midwest, Golf Coast Region, refined in US

Historic Price Movement

1999 - mid 2008: Rise Significantly.

Rising Demand in developing countries

Peak in July 2008 at $145, Financial Crisis

Rebounded to $40 in Jan 2009

Crash in 2014

Black Swan

$105 June 2014 $48 Jan 2015 54% Decrease

Fundamentals: Supply and Demand

From 1990-2013, price rises $20 to $140

3.6% annual GDP growth on average

5 Major readjustments, range from 33% - 76%, 2 – 9 seasons

Reason: Demand shock, we can see dollar appreciate simontaneously

Demand Decline in 2014

Partly explain the crash

Global economy recovery was lower than expectation, except for US

Growth decline in Euro Zone and China

Commodity prices systematically decline on average 10% - 20%

Yet oil price declines more than 50%

Supply

Two Folds

First, US Shale Oil Boom, from 500k barrel/day to 4million barrel/day in four years

Substitute of crude oil, costly to produce, technology advancement cuts cost

Second, OPEC over produce, 30million barrel/day

Libya and Iraq began production in 2014 after crisis