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Crude Price Model: Impact of Realized Fundamentals
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Crude Price Model: Impact of Realized Fundamentals

How much of the 2024 oil price rally can be ascribed to inventories alone?

Rory Johnston's avatar
Rory Johnston
Apr 30, 2024
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Crude Price Model: Impact of Realized Fundamentals
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This post is a touch more exhaustively numeric with a short discussion of key model findings followed by a more technical walkthrough of the various test result differences.

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  • Inventory level is, arguably, the single most important variable contributing to crude price formation; but, different inventory measures have notably different statistical relationships with both realized crude prices and calendar spreads. 

  • Inventory-only modeling largely yields current crude price predictions slightly below where spot prices stand today, suggesting that realized fundamentals only explain part of the past month’s rally.

  • That inventories only explain part of the current rally speaks to a continued price premium emanating from anticipated fundamentals (i.e., consensus supply-demand forecasts), speculative positioning, and political risk premia.

Are oil prices higher over the past month because “fundamentals have tightened”? This is a sentiment that we’re hearing a lot right now, but it can mean at least two distinct things: that current balances have shifted into deeper deficit, which would manifest in inventories over time, and/or that outlooks have shifted toward expectations of deeper deficits to come. In the current case, both happen to be true to varying degrees. 

But forecasts are fleeting, so I’m back to revisit and expand upon my inventory-to-price modeling (see: How Do Oil Inventories Drive Crude Prices?). Commercial inventories are extremely important to price formation; they naturally ebb and flow with the cyclical nature of the oil market. Under this framework, commercial inventories are essentially a residual buffer for global supply and demand, reflecting the cumulative imbalance over a given period of time. Those commercial inventories spike in the face of acute oversupply, as we saw in 2014-16 and again more recently in 2020, and then draw back down as the market shifts into deficit, as we saw in 2021 through 2022.

So, what do current inventory levels say about where prices should be? Let’s dig in.

Initial Findings

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