MBA-IB 2018-20

Business Statistics in R
Semester 3
Factors affecting Crude Oil Prices in U.S.

Under the Guidance of Mr. Prabhu

Presented By:
Akash Sharan (18020241005)
Jasmine Chowdhary (18020241033)
Shreya Dasgupta (18020241067)
Shriya Chandhoke (18020241069)
Contents
Background ........................................................................................................................................... 3
Recent Trends........................................................................................................................................ 3
Objective Statement .............................................................................................................................. 3
Factors Affecting ................................................................................................................................... 4
Algorithm & Output ............................................................................................................................. 5
Interpretation ........................................................................................................................................ 6
Conclusion ............................................................................................................................................. 7
Bibliography .......................................................................................................................................... 7
Background
The U.S. shale revolution that started in 2008 has not just transformed the domestic energy
outlook but also energy markets around the world. Over this time, U.S. crude oil production
has surged 140% to 12.2 million b/d, while gas output is up 55% to 88 Bcf/d. The U.S. is now
easily the world's largest oil and gas producer, yielding 20% more oil and 25% more gas than
Russia. The American shale boom itself is a testament to the non-stop evolution of oil and gas
operational efficiencies and technologies. The U.S. oil and gas industry has become stronger.
Today, oil and gas are our two most important sources of energy, meeting 65% of total U.S.
energy demand. We lean on oil for 97% of our transportation needs, and increasingly, natural
gas leads by generating 35% of all U.S. electricity. Quietly, the U.S. Department of Energy
recently projected that gas will easily add the most amount of power capacity through 2050,
at 235,000 megawatts.

Recent Trends
Shale oil production growth to record highs in the United States drove a 2.5-million-bpd
increase in global oil production last year despite OPEC+ cuts. The U.S. accounted for 88
percent of this growth in global oil production, while OPEC recorded a production decline
overall.
There are multiple forces on both the upside and downside, keeping oil range-bound:

1. The U.S. sanctions against Iran and Venezuela, which took off a combined 800,000 bpd
from the cartel’s production in 2018.

2. The U.S.-China trade war has negative impact on the demand.

3. Tensions in the Middle-east Nations.

4. Given the change of direction from several top central banks around the world,
including the U.S. Federal Reserve. That has given a slight edge to the bulls.

The above geopolitical factors along with observed factors has led to weak demand, and
economic uncertainty.

Objective Statement
 To analyse the various factors affecting the U.S. Crude Oil Prices using a data within a
period of 27th February 2015 to 2nd August 2019. The factors which we have chosen for
our study are Rig Count, Net Imports, Refinery Input and Percent Utilisation.
 Regression Analysis using the data collected.
Factors Affecting
The factors affecting the crude oil prices are:

1. Rig Count:
 Rig Count is a weekly census of the number of drilling rigs actively exploring for or
developing oil or natural gas in the United States. Baker Hughes issues the rig count on
the fifth working day of each month. The Baker Hughes Rig Count is an important
business barometer for the drilling industry and its suppliers. When drilling rigs are
active, they consume products and services produced by the oil service industry.
 The active rig count acts as a leading indicator of demand for products used in drilling,
completing, producing and processing hydrocarbons.
 As oil prices go up, more rigs hit the fields. But it can take months of rising oil prices
before producers are sure enough that prices will hold before they bring additional rigs
into service. And in reverse, there is a lag of course since falling prices will not
immediately drag the rig count lower. The powerful combination of faster and
better horizontal drilling and fracking has helped output explode, even when the rig
count falls.
2. Net Imports:
 United States has been a big consumer in case of oil and gas sector. After the boom of
shale oil and gas, the net imports have been on a declining trend which has strengthened
the influence of US on the oil prices globally. US total net imports in March increased
by 516 tb/d m-o-m to average 1.1 mb/d, yet they remained lower by 1.6 mb/d from the
previous year.
 The United States, for example, exports a minuscule amount of oil compared to what it
imports, and Americans consume more oil than people in any other country do.
Consequently, the U.S. economy benefits from cheap oil and gas. Lower import prices
ease stress on the federal budget, while Americans enjoy greater purchasing power
because less of their disposable income is spent at the gas pump.
3. Percent Utilization and Refinery Input:
 Regardless of the source of crude oil, the price is determined in the world market and
both imported and domestic crude oil is priced according to the supply/demand balance
and pricing dynamics on the world oil market.
 Using more expensive crude oil (lighter, sweeter) requires less refinery upgrading but
supplies of light, sweet crude oil is decreasing and the differential between heavier and
sourer crudes is increasing. Using cheaper heavier crude oil means more investment in
upgrading processes. Costs and payback periods for refinery processing units must be
weighed against anticipated crude oil costs and the projected differential between light
and heavy crude oil prices.
 Since the use of heavy crude oil is rampant, it contains various impurities such as
Sulphur and carbon which while refining releases lot of harmful by products. Hence
extra efforts are required to refine those impurities as well, which ultimately impacts
the final price of refined oil.
Algorithm & Output
> d<-read.csv (file. Choose (), header=T)
> attach(d)
The following objects are masked from d (pos = 3):
NetImport, PercentUtilization, Price, RefinerNetInput, Rig
The following objects are masked from d (pos = 4):
NetImport, PercentUtilization, Price, RefinerNetInput, Rig
The following objects are masked from d (pos = 5):
NetImport, PercentUtilization, RefinerNetInput, Rig
The following objects are masked from d (pos = 6):
NetImport, PercentUtilization, Price, RefinerNetInput, Rig
The following objects are masked from d (pos = 7):
NetImport, PercentUtilization, RefinerNetInput, Rig
The following object is masked from d (pos = 9):
Rig
> y<-d$Price
> x1<-d$Rig
> x2<-d$NetImport
> x3<-d$RefinerNetInput
> x4<-d$PercentUtilization
> model<-lm(y~x1+x2+x3+x4)
> summary(model)
Call:
lm(formula = y ~ x1 + x2 + x3 + x4)
Residuals:
Min 1Q Median 3Q Max
-17.7218 -5.4119 0.5133 5.4333 15.5609
Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) 11.653426 12.955740 0.899 0.3694
x1 0.030920 0.003981 7.766 2.76e-13 ***
x2 -0.589682 0.470724 -1.253 0.2116
x3 4.414593 2.509294 1.759 0.0799 .
x4 -0.552035 0.490049 -1.126 0.2611
---
Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1
Residual standard error: 7.273 on 227 degrees of freedom
Multiple R-squared: 0.4643, Adjusted R-squared: 0.4548
F-statistic: 49.18 on 4 and 227 DF, p-value: < 2.2e-16
>

Interpretation
From the above output, it is seen that the correlation coefficient comes out to be 0.4548
indicating a lack of good dependence of the prices of crude oil on the four factors selected by
us. Out of the four factors, the rig count variable has the maximum contribution in affecting
the crude oil prices. This can be observed as the p-value of the rig count variable is less than
the significant value α.
 Conclusion
The prices of crude oil are a function dependent on the four variables with rig count
contributing the maximum. The correlation coefficient was low since the prices of the crude
oil also depends on other geopolitical factors which are difficult to quantify. The various
geopolitical factors affecting the crude oil prices along with the above variables are:

1. US-China Trade War

2. Middle East Tensions
3. U.S. Sanctions on Iran & Venezuela

Bibliography

Weekly Cushing, OK WTI Spot https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=P

Price FOB (Dollars per Barrel) ET&s=RWTC&f=W
https://bakerhughesrigcount.gcs-web.com/rig-count-
Rig Count
overview?c=79687&p=irol-rigcountsoverview
Weekly U.S. Net Imports of
Crude Oil and Petroleum https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=P
Products (Million Barrels per ET&s=WTTNTUS2&f=W
Day)
Weekly U.S. Refiner Net Input of
https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=P
Crude Oil (Million Barrels per
ET&s=RWTC&f=W
Day)
Weekly U.S. Refiner Net Input of
https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=P
Crude Oil (Thousand Barrels per
ET&s=WPULEUS3&f=W
Day)