• 2 days PDVSA Booted From Caribbean Terminal Over Unpaid Bills
  • 2 days Russia Warns Ukraine Against Recovering Oil Off The Coast Of Crimea
  • 2 days Syrian Rebels Relinquish Control Of Major Gas Field
  • 2 days Schlumberger Warns Of Moderating Investment In North America
  • 2 days Oil Prices Set For Weekly Loss As Profit Taking Trumps Mideast Tensions
  • 3 days Energy Regulators Look To Guard Grid From Cyberattacks
  • 3 days Mexico Says OPEC Has Not Approached It For Deal Extension
  • 3 days New Video Game Targets Oil Infrastructure
  • 3 days Shell Restarts Bonny Light Exports
  • 3 days Russia’s Rosneft To Take Majority In Kurdish Oil Pipeline
  • 3 days Iraq Struggles To Replace Damaged Kirkuk Equipment As Output Falls
  • 3 days British Utility Companies Brace For Major Reforms
  • 3 days Montenegro A ‘Sweet Spot’ Of Untapped Oil, Gas In The Adriatic
  • 3 days Rosneft CEO: Rising U.S. Shale A Downside Risk To Oil Prices
  • 4 days Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 4 days OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 4 days London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 4 days Rosneft Signs $400M Deal With Kurdistan
  • 4 days Kinder Morgan Warns About Trans Mountain Delays
  • 4 days India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 4 days Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 4 days Russia, Saudis Team Up To Boost Fracking Tech
  • 5 days Conflicting News Spurs Doubt On Aramco IPO
  • 5 days Exxon Starts Production At New Refinery In Texas
  • 5 days Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 5 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 5 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 6 days China To Take 5% Of Rosneft’s Output In New Deal
  • 6 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 6 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 6 days VW Fails To Secure Critical Commodity For EVs
  • 6 days Enbridge Pipeline Expansion Finally Approved
  • 6 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 6 days OPEC Oil Deal Compliance Falls To 86%
  • 6 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 6 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 7 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 7 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 7 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 7 days Aramco Says No Plans To Shelve IPO
Alt Text

Oil Prices Poised To Rise In Early 2018

A consistent fall in comparative…

Alt Text

Clashes In Kurdistan Send Oil Prices Higher

Reports of skirmishes between Iraqi…

Alt Text

OPEC Favors 9-Month Extension Of Production Cut Agreement

According to Reuters sources, OPEC…

Sergey Narkevich

Sergey Narkevich

- currently a strategy analyst with Promsvyazbank PJSC, Moscow, Russia- experience in Russian banking and economy since 2004- expertise in analyzing energy commodities markets- building…

More Info

What Iron Ore Futures Tell Us About Oil Prices

What Iron Ore Futures Tell Us About Oil Prices

Recent Commodity Prices Dynamics

With commodity prices falling precipitously during the last 2 years it has been a hard time for both commodity market analysts and commodity exporting countries’ finance ministers. Expectations of prices moving even lower are still elevated especially for oil and other energy resources. Nevertheless, there was a bright spot recently: a range of metals prices have rebounded from near all-time lows. Iron ore took most headlines with an almost 40 percent jump since January 2016 for the 62 percent ferrous content shipments delivered to Qingdao China.

(Click to enlarge)

Basic Model

Does it mean anything for other commodities – and for oil in particular? The answer seems “yes”. Iron ore futures taken with a 7 months lag are having surprising success in modeling future oil price scenarios. Regression of monthly data for 2010-16 explains 76 percent of Brent oil price dynamics. If we take 2013-16 data period we get an increased 91 percent R-squared. Related: Eni Hopes To Develop Supergiant Gas Field By 2017

(Click to enlarge)

What Is in This Connection?

This connection makes sense if the price of iron ore is considered as relating to approved investment projects with certain amounts of steel and other construction materials needed. Oil at the same time is much more flexible in its use and can be consumed right away. In other words, iron ore consumers plan and forecast their supplies more in advance than oil – statistically 6 months seems the planning gap.

This gives a great possibility for forecasting oil prices taking recent data for metals and calculating the oil price for the next half-year period. Of course, the results of this approach are only supplementary to full supply-demand models and should be taken with great caution as oil depends on many other factors. Nevertheless, this simple approach may provide some guidance for future developments in the oil market. Related: Oil Majors Lose Faith In The North Sea – 100 Shut Downs Looming

Recent Oil Price Movements

What is interesting is the seeming undervaluation of Brent crude in recent months. Starting from September 2015 the Brent oil price stubbornly stayed below the regression line. About 5-10 dollars is sliced from Brent because of a number of factors such as global market volatility, geopolitical and other disturbances. It seemingly explains the difference between the forecast made using this simple calculations and our full-scale oil price model based on supply and demand.

 

  Related: Why Are Bankrupt Oil Companies Still Pumping?

(Click to enlarge)

(Click to enlarge)

Summary

While results of this naïve model are based only on a single factor and should be taken with a high degree of caution, it nevertheless provides useful insight into where oil prices could go in the near future.
It is likely that we will see a rebound in oil prices, but they will still be lower than their potential.

By Sergey Narkevich for Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment
  • Hoang Anh on May 17 2016 said:
    Your model is very interesting
    How about the impact of oil price on iron ore? Could you please discuss more about this
    thank you

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News