Regression analysis of historic oil prices: A basis for future mean reversion price scenarios

R. Weijermars and Z. Sun

Global Finance Journal, 2018, vol. 35, issue C, 177-201

Abstract: We propose price forecasting algorithms based on regression analysis of historic oil prices over 150years (1861–2012). From 1986 onward daily market prices allow more detailed analyses of the principal crude oil benchmarks (West Texas Intermediate [WTI] and Brent). The mean reversion price for a given time period corresponds to the marginal cost of supply. When supply and demand are out of equilibrium, spot prices move in a bandwidth bound at the bottom by cash cost of supply and at the top by the concurrent price of demand destruction. Short-term elasticity of demand is 0.015 (highly inelastic), and long-term elasticity of supply changed from 0.99 (highly elastic) during 1965–1983 to 0.39 (less elastic) during 1984–2012. We derive functions for the long-term equilibrium price and expand them into scalable equilibrium price functions for forecasting future price scenarios if “business-as-usual” is assumed. We also consider how two hypothetical black swan events (“unknown unknowns”) may affect the mean equilibrium price.

Keywords: Oil spot price; Mean reversion price; Demand elasticity; Supply elasticity; Price scenarios (search for similar items in EconPapers)
JEL-codes: Q11 Q31 Q47 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:35:y:2018:i:c:p:177-201

DOI: 10.1016/j.gfj.2017.10.007

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