Rystad Energy has over the last year developed a model to give a more realistic simulation of the cyclical behavior of the oil price. The model has correctly predicted the oil price increase seen over the last months. Now it shows that the oil price will be highly volatile going forward, but also that a swing producer can stabilize the market if the right heuristics are applied. The model is based on system dynamics, which is a mathematical approach to model the nonlinear behavior of complex systems based on feedback loops and time delays. The key findings are:

• In an unregulated market, the system dynamics approach shows that oil prices can be expected to remain highly volatile in a steady four-year cycle.
• Contributions from the shale industry will exaggerate the cycles rather than dampen them.
• Swing producers could manage to stabilize oil prices mainly within the range of $60 to $90 per barrel if the reaction time is fast enough and if spare capacity is sufficient.
• All else being equal, lower variability of the oil price, due to its economic and strategic importance, is regarded as positive insofar as it helps to stabilize the global economy.

“I’m very happy to see that our model is able to capture the price behavior we actually see in the market,” Rystad Energy CEO Jarand Rystad says. “Traditionally, oil market predictions have been based on linear forecasting of supply and demand. The dynamic element generating the cyclicality of the business has been very difficult to capture in a mathematical model. Thus, I think this has been a real achievement. Instead of being surprised by the roller-coaster nature of the oil market, we can now understand such behavior and even model how the most volatile price cycles could be mitigated,” he adds. 

The report gives a detailed description of the methodology used, scenarios tested and the heuristics needed for a swing producer to dampen oil price volatility.  

Jo Husebye, partner in Rystad Energy, adds: 
“One of the surprising results from the model was to see how the dynamics of shale oil increase the volatility of crude price swings and shorten the cycle time. Moreover, we have seen that only if a swing producer can react fast enough – within about three months, and with sufficient spare capacity and willingness to alter its production levels significantly – that potential oil price spikes and downturns could be dampened and corresponding volatility be reduced.”

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