Analysis of current economic conditions and policy
Stock prices and oil prices
Ben Bernanke weighs in on why stock prices and oil prices have been moving together recently.
9 thoughts on “Stock prices and oil prices”
AS
Professor Hamilton,
While trying to update the data for your model, I Looked at the Investing.com web site for the price of copper, I seem to see historical prices that differ from the RATS file you kindly provided last year. Is it possible that the historical prices have been adjusted? Seems unlikely, but I do not see a match with your prior file using the weekly data download option. Also, have you tried to add the VIX to your model? If you update your data, I would appreciate a seeing a new data file. Using your previous file I was able to match the results, but the model output does not seem as statistically significant for the copper variable using the updated data I am finding. Thanks.
James_HamiltonPost author
AS: I have not re-estimated the model. It is the same regression it has always been estimated with data that ended in June 2014. If investing.com subsequently changed the pre-2014 copper prices, I do not know why that would have been.
You presumably noticed that Bernanke took data directly from Bloomberg and obtained similar results to mine.
AS
I see the correct date now for copper I was off by one week. Sorry about that.
AS
Professor Hamilton,
I did notice that Dr. Bernanke took data from Bloomberg. I was not questioning your model. I was questioning why I was having trouble matching the updated data with your previous file. For some reason, I missed observing that the copper price date and other dates were different by a week from yours. Since it looks like the copper date is as of Sunday,I had tried to download all data for the week ending Sunday, so all the dates would coincide, but that effort did not match your data. It looks like your date is as of Friday, but the Sunday data should match. For some reason, I had to move all my data down one week to coincide with your data. My apologies if you thought I had the audacity to question your models. It is a privilege to learn from you and Professor Chinn. Thanks!
Jeffrey J. Brown
The WSJ has an article on the IEA outlook for global total liquids supply & demand, with an interesting chart (do Google Search for access):
WSJ: IEA Sees Global Oil Markets Rebalancing Next Year
IEA says ‘supply and demand will gradually rebalance by 2017, with a corresponding recovery in oil prices from around $30 a barrel’
However, in my opinion the IEA outlook does not take into account two critical factors: (1) The composition of the global Crude + Condensate (C+C) inventory oversupply (mostly condensate, in my opinion) and (2) Even as production increases, net exports can fall, because of domestic consumption in net oil exporting countries.
After examining available regional and global production data (using EIA, OPEC and BP data sources), in my opinion actual global crude oil production – generally defined as 45 API Gravity or lower crude oil – has probably been on an “Undulating Plateau” since 2005. At the same time, global natural gas production and associated liquids, condensate and natural gas liquids (NGL), have so far continued to increase. . . .
My premise is that US (and perhaps global) refiners hit – late in 2014 – the upper limit of the volume of condensate that they could process if they wanted to maintain their distillate and heavier output. This resulted in a build in condensate inventories, reflected as a year over year build of 100 million barrels in US C+C inventories.
Therefore, in my opinion the US and (and perhaps global) C+C inventory data are fundamentally flawed when it comes to actual crude oil inventory data. Note that according to Iranian sources, the bulk of their floating offshore storage consists of condensate, which they were permitted to export under the sanctions. In my opinion, this suggests that we may be seeing both a US and a global glut of condensate in storage.
In any case, here is the critical point: If it took trillions of dollars to keep us on a post-2005 “Undulating plateau” in actual global crude oil production, what happens to global crude oil production given the large and ongoing cutbacks in global upstream capex?
In regard to Factor #2:
Following is a link to a discussion, in three sequential comments, of the Export Land Model (ELM, a simple mathematical model which assumes a 5%/year rate of decline in production and a 2.5%/year rate of increase in consumption, in a net oil exporting country), the Six Country Case History (major net exporters that hit or approached zero net exports from 1980 to 2010, excluding China) and the (2005) Top 33 Net Exporters, with graphics for each item:
Note that what I define as the ECI Ratio (Export Capacity Index) is the ratio of production to consumption, and CNE = Cumulative Net Exports (for a defined time period).
Based on the mathematical model, which is confirmed by the empirical data (Six Country Case History), a declining ECI Ratio tends to correlate with an accelerating rate of depletion in remaining CNE.
For example, about the only metric that most analysts focus on is the top line production number in a net oil exporting country, and from 1995 to 1999, Six Country production rose by 2%, but in only four years they had already shipped 54% of their post-1995 CNE.
I estimate that Saudi Arabia may have already shipped in the vicinity of half of their post-2005 CNE. Note that annual Saudi net oil exports fell from 9.5 million bpd in 2005 to 8.4 million bpd in 2014 (probably remaining at about 8.7 mililon bpd in 2015, EIA + BP data). In other words, Saudi net exports, after increasing very rapidly from 2002 to 2005, have almost certainly been below their 2005 rate for 10 straight years.
But the hidden danger, which almost no one is focused on, is the ongoing–and accelerating–rate of depletion in the remaining volume of post-2005 Saudi and Global Cumulative Net Exports of oil.
genauer
1. I see it as pretty flattering, when fomer Fed chief chief Bernanke mentions your method 3 times. That doesn’t happen that often. And them refining on it is the most applause for your pretty insightful posting December 2014, when the oil rout just really got going.
3. it was the comments of AS, while somewhat subservient (“audacity”) which triggered some additional remarks and thinking , and questions
4. questions
a) why copper and not a broader commodity index like CRB ?
b) or at least incorporating aluminum and iron ore
5. remarks
a) Bernanke going to direct 10 year rates, instead of Hamiltons log rates, seems to me a polite fixing towards an
aa) consistent delta price of bonds, and
bb) avoiding arbitrary singularities around the zero bound, with real AAAA countries
All I meant by the “audacity ” comment is that I don’t have the “portfolio” to question a model used by you and Dr. Bernanke. Maybe other readers have the credentials to question your work, I do not.
Professor Hamilton,
While trying to update the data for your model, I Looked at the Investing.com web site for the price of copper, I seem to see historical prices that differ from the RATS file you kindly provided last year. Is it possible that the historical prices have been adjusted? Seems unlikely, but I do not see a match with your prior file using the weekly data download option. Also, have you tried to add the VIX to your model? If you update your data, I would appreciate a seeing a new data file. Using your previous file I was able to match the results, but the model output does not seem as statistically significant for the copper variable using the updated data I am finding. Thanks.
AS: I have not re-estimated the model. It is the same regression it has always been estimated with data that ended in June 2014. If investing.com subsequently changed the pre-2014 copper prices, I do not know why that would have been.
You presumably noticed that Bernanke took data directly from Bloomberg and obtained similar results to mine.
I see the correct date now for copper I was off by one week. Sorry about that.
Professor Hamilton,
I did notice that Dr. Bernanke took data from Bloomberg. I was not questioning your model. I was questioning why I was having trouble matching the updated data with your previous file. For some reason, I missed observing that the copper price date and other dates were different by a week from yours. Since it looks like the copper date is as of Sunday,I had tried to download all data for the week ending Sunday, so all the dates would coincide, but that effort did not match your data. It looks like your date is as of Friday, but the Sunday data should match. For some reason, I had to move all my data down one week to coincide with your data. My apologies if you thought I had the audacity to question your models. It is a privilege to learn from you and Professor Chinn. Thanks!
The WSJ has an article on the IEA outlook for global total liquids supply & demand, with an interesting chart (do Google Search for access):
WSJ: IEA Sees Global Oil Markets Rebalancing Next Year
However, in my opinion the IEA outlook does not take into account two critical factors: (1) The composition of the global Crude + Condensate (C+C) inventory oversupply (mostly condensate, in my opinion) and (2) Even as production increases, net exports can fall, because of domestic consumption in net oil exporting countries.
In regard to Factor #1:
Estimates Of Post-2005 US, OPEC & Global Condensate Production Vs. Actual Crude Oil Production
http://oilpro.com/post/22276/estimates-post-2005-us-opec-global-condensate-production-vs-actua
In regard to Factor #2:
Following is a link to a discussion, in three sequential comments, of the Export Land Model (ELM, a simple mathematical model which assumes a 5%/year rate of decline in production and a 2.5%/year rate of increase in consumption, in a net oil exporting country), the Six Country Case History (major net exporters that hit or approached zero net exports from 1980 to 2010, excluding China) and the (2005) Top 33 Net Exporters, with graphics for each item:
http://peakoilbarrel.com/opec-except-iran-has-peaked/#comment-556985
Note that what I define as the ECI Ratio (Export Capacity Index) is the ratio of production to consumption, and CNE = Cumulative Net Exports (for a defined time period).
Based on the mathematical model, which is confirmed by the empirical data (Six Country Case History), a declining ECI Ratio tends to correlate with an accelerating rate of depletion in remaining CNE.
For example, about the only metric that most analysts focus on is the top line production number in a net oil exporting country, and from 1995 to 1999, Six Country production rose by 2%, but in only four years they had already shipped 54% of their post-1995 CNE.
I estimate that Saudi Arabia may have already shipped in the vicinity of half of their post-2005 CNE. Note that annual Saudi net oil exports fell from 9.5 million bpd in 2005 to 8.4 million bpd in 2014 (probably remaining at about 8.7 mililon bpd in 2015, EIA + BP data). In other words, Saudi net exports, after increasing very rapidly from 2002 to 2005, have almost certainly been below their 2005 rate for 10 straight years.
But the hidden danger, which almost no one is focused on, is the ongoing–and accelerating–rate of depletion in the remaining volume of post-2005 Saudi and Global Cumulative Net Exports of oil.
1. I see it as pretty flattering, when fomer Fed chief chief Bernanke mentions your method 3 times. That doesn’t happen that often. And them refining on it is the most applause for your pretty insightful posting December 2014, when the oil rout just really got going.
2. a lot of people were pondering what that means geopolitically
http://de.slideshare.net/genauer/sampler-of-gdp-and-other-data-emphasis-on-russia , page 4 exchange rates via brent price
3. it was the comments of AS, while somewhat subservient (“audacity”) which triggered some additional remarks and thinking , and questions
4. questions
a) why copper and not a broader commodity index like CRB ?
b) or at least incorporating aluminum and iron ore
5. remarks
a) Bernanke going to direct 10 year rates, instead of Hamiltons log rates, seems to me a polite fixing towards an
aa) consistent delta price of bonds, and
bb) avoiding arbitrary singularities around the zero bound, with real AAAA countries
Germany https://www.comdirect.de/inf/anleihen/detail/uebersicht.html?ID_NOTATION=98858819
Switzerland https://www.comdirect.de/inf/anleihen/detail/uebersicht.html?ID_NOTATION=122102666
Approaching Zero rates even over the maximum of available bond spectrum of 30 – 50 years
genauer: No, of course I did not take the log of the 10-year yield! I used the yield itself. Anything else would be completely silly.
Now I have the problem, why Bernankes and your coefficient for it are so different
Professor Hamilton,
Any comments about the St. Louis Fed. blog yesterday about regarding oil and Inflation?
https://www.stlouisfed.org/on-the-economy/2016/february/future-oil-price-consistent-inflation-expectations
All I meant by the “audacity ” comment is that I don’t have the “portfolio” to question a model used by you and Dr. Bernanke. Maybe other readers have the credentials to question your work, I do not.