A statistics‐based approach for crude oil supply risk assessment

• Author: Hossein Hassani,Afshin Javan,Ryszard Pospiech,Adedapo Odulaja,Mohammad Ali Danesh
• Date: 01 September 2017
• Published date: 01 September 2017
• DOI: http://doi.org/10.1111/opec.12101

A statistics-based approach for crude oil

supply risk assessment

Hossein Hassani, Mohammad Ali Danesh, Afshin Javan, Ryszard Pospiech

and Adedapo Odulaja

OPEC Secretariat, Helferstorferstrasse 17, 1010 Vienna Austria. Email: hhassani@opec.org

Abstract

This paper presents two approaches towards quantifying short-term crude oil supply uncertainty. It

provides some background information on the oil market and discusses different methods used in

forecasting supply. Both approaches—semiquantitative (SQ) and Monte Carlo (MC)—are based

on a risk matrix with likelihood and severity scores assigned. The result of the SQ approach is a

risk band presented in percentage terms, whereas the MC method yields a probability distribution.

The differences, advantages and disadvantages, as well as the potential expansions of both

approaches are discussed. Both methods are applied to a set of major non-OPEC oil producing

countries, and the obtained results are compared.

1. Introduction

Recent events in the oil market have raised great interest in the uncertainty of oil supply.

Having grown by 3.8 mb/d between 2013 and 2015, the oil supply outpaced global

demand growth by 1.3 mb/d, despite the decline in prices. Factors such as geopolitical

unrest, tight fiscal regimes and technological developments bring uncertainty to the oil

supply outlook. Thus, quantifying the effect of such factors on future oil supply will be

valuable information for ensuring the stability of the oil market.

The selection of the quantitative methods used in forecasting oil supply and the

associated uncertainty, largely depends on the time frame of the forecast. Long-term oil

supply forecast methods tend to be based on oil reserves, discovery rates, policy and

technological assumptions (Eckbo et al., 1978; OPEC, 2015). New projects coming on

line and decline rates are usually the basis for a medium-term forecast (IEA, 2016). For

the short term, however, a more qualitative approach is necessary. In fact, most of the

experts dealing with the subject publish updates on a monthly (OPEC, 2016), weekly

(PIW, 2016) or even daily (Energy Intelligence, 2016) basis, often disaggregating their

Any views expressed are solely those of the author(s) and so cannot be taken to represent those of

the OPEC (Organization of the Petroleum Exporting Countries). This paper should therefore not be

reported as representing the views of the OPEC or its Member Countries.

©2017 Organization of the Petroleum Exporting Countries. Published by John Wiley & Sons Ltd, 9600 Garsington

Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

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