Oil models

I posted this separately to our earlier note on oil, as it is slightly more complex.

A long while ago Ben Bernanke had a short article in which he referenced a simple oil price model, built on demand side proxies, with the residual left to proxy supply side dynamics. The apparatus works the way you’d expect (the signs of coefficients and their magnitudes make sense), and is a useful reflection on markets.

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You can see the demand side proxies in our regression table above, where everything is statistically significant to at least the 10% level.

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That recent (past few months) massive increase in the actual oil price, with the implied price remaining mostly flat, reflects the tightening on the supply side, where the market has gone from a slight deficit to one in which the Russian share of global supply is impacted. (Russia is some 10% of the market. Exactly how much of that 10% is now out of market is harder to say, maybe 3-4% at a guess.)

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