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Farid Tayari: In this video and following videos, I'm going to explain the factors that are influencing the crude oil price. So there are many factors that can have an impact on crude oil price that we can name some of them as weather, US economy, international economy, US dollar exchange rate comparing to other foreign currencies, geopolitical events, supply and demand statistics, and crude oil and petroleum distillates inventory.
First, US weather-- heating oil is a refined distillate of crude oil. And it is being used by 5.7 million-- around 6 million households-- in the United States for space heating and warming of the water. Around 80% of those six million households are living in Northeast part of the country.
So if there is a cold winter, if there is a cold wave hitting this part of the country, we're expecting to have higher demand for heating oil. And it could be a good signal for price of oil being potentially increased.
I put a link here and this is slide to EIA website-- Energy Information Administration-- that includes the heating oil prices. So in addition to looking for data such as temperature or having a potential prediction of wind chill, there's also another indicator called HDD or Heating Degree Days. It's a good sign for energy demand.
So HDD represents the amount of energy being used to heat the space inside the building to reach 65 degrees, Fahrenheit. The lower outside temperature, it means that more energy has to be used for space heating. So historical and forecasted issues can be found at this link. It takes you to the National Oceanic and Atmospheric Administration. It can be a good metric for expected demand of heating oil and eventually, crude oil.
So one thing that we have to note that HDD is always positive-- there's no negative-- in case for the summer, the outside temperature is higher than 65, and then energy has to be used to cool down the space to the 65. We use this metric called CDD, or Cooling Degree Days. It's a measure for the amount of energy that needs to be used to cool down the building.
The other weather event that could potentially affect the crude oil price is a hurricane. According to EIA-- Energy Information Administration-- around 23% of the offshore oil production and 45% of the US oil refining capacity is around the Gulf of Mexico. And this is the section that in case of hurricane, that could potentially be affected and the supply can be interrupted.
So around 24 hours before the hurricane, the site-- which is a production site or drilling site-- has to be evacuated. And after the hurricane, it takes around at least 72 hours to reman the facility and start production.
In case of hurricane, there are two possible things that can happen, the interruption in the production because the site has to be evacuated. Or if the hurricane is severe, it can also damage the facility. For example, two cases-- Hurricane Katrina in 2005, 12 rigs and 30 platforms were damaged. And 18 of those platforms were completely destroyed.
Hurricane Ivan in 2004 damaged seven rigs and destroyed two rigs, and seven platforms destroyed. And it had consequences-- flooding and so on and so forth. And this can cause the supply interruption or the prediction of supply interruption. So when there is an interruption in supply, price can potentially increase.
I put a link here and it takes you to National Hurricane Center. It is a good resource for getting information of hurricane events. The official hurricane season begins on June 1st and it goes to November 3rd with a peak around mid-September. During this time, Weather Channel provides information through tropical update report.
The other factor that fixed the price of oil is the economy. Oil is a global commodity and the United States economy and other major countries in terms of economy. They can potentially influence the price of crude oil.
In this video, I'm going to explain the effect of US economy and crude oil. And in the following videos, I'm going to focus on international aspects of the economy and factors that are affecting crude oil price.
So energy runs the economy. And every aspect of economy can potentially influence the crude oil price. If economy is doing good, if economy is growing, it means there will be higher demand in future. Demand will be increasing. Strength and weakness of domestic economy directly impacts their prices, and also the perception of prices change and the prediction of the demand and eventually, the price predictions and the reaction of the traders to the price.
One of the most obvious and most frequently reported indications of economic health is stock market. Dow- Jones Industrial Index, S&P 500, and NASDAQ are daily reports that indicate the performance of the stock market. If these metrics are showing a good performance for the stock market, it means that economy is growing. And it could go up.
There are also weekly, monthly, quarterly economic reports that can have immediate impact on the price perception. Unemployment rate and reports being published by US Department of Labor-- this report is published every Friday. Institute of Supply Management Index report published monthly. Inflation rate, which is calculated from the CPI, Consumer Price Index, is being reported by US Bureau of Labor Statistics. It's a monthly report. GDP, US Gross Domestic Product, which also being published by Bureau of Economic Analysis and it's being published quarterly.
Also, US Department of Commerce's Economic and Statistics Administration has number of economic indicators that include data from US Census Bureau and US Bureau of Economic Analysis. These economic metrics are including construction spending, housing starts, housing sales, US international trade, monthly wholesale trade, manufacturing and trade, sales for retail and food services, personal income, and personal spending.
Also, quarterly earning reports from US companies-- these are the report metrics in economic parameters that can help us predict the future demand.
The next video-- so I'm going to explain the other factors that can influence crude oil price.