Crude Oil Price Forecasting Model Using Machine Learning

As the growth in the shale, oil market is continuously increased the input of oil supplies in the market by 11 per cent, which make an oil price fall cause of overwhelming supply (Meyer,2013).As a result of this, the buyer has more choice to seek a supplier , which has a lower prices and better contract condition. Thus, these forces become a high threat to Afren.

High oil price for last few years drove the energy industry to come up with a new technological innovation and the result is a new drilling technique like hydraulic fracturing. This new technology made drilling easy in North Dakota and Texas (Timiraos, 2014). With more oil drilled domestically, U.S became net energy exporter instead of an importer. Also falling demand due to energy conservation, more efficient cars, less demand in China and OPEC opted against cutting production levels made the price go down. When Global economic growth was slowing and most economists agree that both supply and demand played role in the last year oil price plunge. Driven by the increased supply, oil price dropped from $82 to $50 between Oct'14 and Jan'15. The IMF summarizes 58% of the drop in oil price to supply and only 42% to demand.

The United States consumes more than 25% of the world’s petroleum products which is a large percentage, considering only 3% of the world’s oil reserves are produced by the United States. Given the demand for petroleum products such as gasoline, understanding why Crude oil prices have skyrocketed in recent years, is not hard. According to the article “Ending America’s Oil Addiction,” the surge in crude oil prices can be reduced in large part to the simple concepts of supply and demand. (Cooper, 2008)

Some emergent countries have put a lot of effort to find new reservoir or find the best way to recover oil from deep seas such as The pre-salt in Brazil. America has high projections for the future with fracking. However, lower prices would put at risk investments in unconventional sources. For example, tar sands, shale oil, deep sea and fracking. Our forecast is that the crude oil price tend to slowly rise until the market balance it self to avoid oversupply especially because of the weakening in the global oil

California has one of the highest gas prices in the United States (Laskoski, usnews.com). However, compared to many developed nations, United States has one of the cheapest gas prices (Hargreaves, CNNMoney.com). Discussion of the reasons gas prices fluctuate is a detailed matter which requires an overview, starting from the extraction of crude oil, chemical processes, regulations, taxes, and gas retail market. The factors that can affect the price at gas station can be categorized into three main categorize including crude commodity prices, technology regulation and taxes, and retail market. As crude oil is the base resource for the production of gasoline (also known as Gas or Petrol, not be confused with Petroleum) its price plays an important

This report will consist of the causes and consequences of the changing price of WTI crude oil and recent trends in the global price of oil. It will also include the effects of the ever-changing price of oil on individuals, business firms, governments and the economy.

From tornado results at all fields, oil price is a dominant factor affecting NPV and GT values. Hence, from both government and investors view, oil price fluctuation is a crucial thing to consider.

prices, regulations, and innovations) are forecasted and inputted into the model and the behavior of oil

Oil is one of the most valued products in the world—which means oil can be very inelastic. It is something that people need in order for them to keep their cars going and for many other reasons in this world. When the cost of gas drops down, the usual consumer’s response is positive, however, that might not be the case for some producers in the market.

Shale revolution started about ten years ago due to technological developments such horizontal drilling and hydraulic fracturing. The increasing exploitation of shale oil significantly affected the oil market. In this report, WTI oil price was predicted over the next five years using historical data. A discussion of major factors that historically affected oil prices is presented. Historical events were linked to current and expected future events to evaluate the predicted prices. To further evaluate the forecasted prices, they were compared to the predicted prices by the Economy Forecast Agency.

Unlike Brent, North American crude production is up amid a "shale oil revolution." To capture this fact, we use two variables published by the EIA. The first, CANADA, is the weekly amount of Canadian crude imported into the Petroleum Administration for Defense's Midwestern District ("PADD 2") where Cushing is located. The second, RIGS, is a monthly count of rotary rigs operating onand off-shore in the 50 United States. Both series increase steadily over most of our sample period, accelerating sharply from 2009 (RIGS) or 2011 (CANADA). Both variables should be inversely related to the spread: ceteris paribus, more North American supply should push down WTI's price—especially if the oil faces difficulties reaching international markets.

The United States is the largest consumer of gasoline in the world. Not only do we use more than any other country in the world, but our usage is almost twice as much as the second largest consumer in the world. We need gasoline to power our cars, boats, and the modes of transportation we use to transport the goods we produce from one place to another. But what determines the price we pay for this precious commodity? Gasoline is produced from the refining of crude oil. We import and produce oil by the barrel. One barrel of unrefined oil produces approximately 19 gallons of gasoline. The crude oil we import is a commodity, and the world market is what determines the price of these barrels of oil, along with demand. The world demand can be controlled in a couple different ways. First, The Organization of the Petroleum Exporting Countries (OPEC), which is an oil cartel whose members are some of the largest oil producing countries in the world, control the amount of oil that is put into the world market. By controlling the amount available they can control the demand from countries that mainly rely on this import. The

As most of the world knows oil prices have been plunging downwards since June 2014, in which a barrel of oil has fallen more than 70 percent from that time, was $90- $100 a barrel, now $40 a barrel and approaching $30 a barrel. This fall basically came about due to rapid increase in global oil production which started to exceed its global demand therefore forcing prices down. “Earnings are down for companies that made record profits in recent years, leading them to decommission more than two-thirds of their rigs and sharply cut investment in exploration and production. Scores of companies have gone bankrupt and an estimated 250,000 oil workers have lost their jobs.” (Krauss, 2016).

Through group brainstorming, we came up with a number of variables that theoretically should affect the price of crude oil, and we used Bloomberg to find data on the same. Our two main criteria for a “good” variable were statistical significance and R2. We conducted a regression analysis as well as multiple regression analysis to double check the variables we selected on the Bloomberg terminal. Moreover, so as to not omit any good variables, we broadened our search to the Oil commodity section to find relevant industry reports and prospective variables. Through a process of rough trial and error, and after eliminating several variables due to problems such as multicollinearity and heteroskedasticity, we finalized the three variables that are mentioned below.

Beginning June 2014, the price of West Texas Intermediate (WTI) crude has dropped from $105 per barrel to where it is now currently priced at $42 per barrel on November 2015, constituting a price decrease of more than 60% over a period of eighteen months. This price drop is due to an increase in oil production primarily coming from Saudi Arabia and Iraq along with the American shale plays that is causing an outward shift in the global supply of crude oil. With the short term demand for oil being inelastic, a moderate increase in supply will cause a large decrease in the market price. Basic intuition of an oil producing firm with enough market power to face a downward sloping demand schedule, OPEC, would have it so production is scaled back in order to drive prices back up to former levels, however, this is not the case of what happened. OPEC, along with its lead producing country, Saudi Arabia, has been producing at their maximum production capacity in order to saturate the market as much as possible and drive oil prices down even lower.