Review of 'The World Crude Oil Storage Index as a Predictor of Price Trends'
a KAPSARC commentary written by Philipp Galkin and Jennifer I. Considine
In the ever-evolving landscape of global energy markets, accurately predicting crude oil price trends remains both a challenge and a necessity for traders, analysts, and policymakers. The article, "The World Crude Oil Storage Index as a Predictor of Price Trends," by Philipp Galkin and Jennifer Considine, offers a fresh perspective on this subject by introducing the World Crude Oil Storage Index (COSI) as a forward-looking tool that could reshape how market participants anticipate price movements.
The paper outlines the inherent complexities of crude oil price dynamics, emphasizing patterns like rising, falling, and the more ambiguous "choppy sideways" trends, often depicted as symmetrical triangles or pennant formations in technical analysis. What sets this article apart is its focus on the predictive power of the COSI—an index derived from spread options values across major global ports, encompassing various competing crude types.
One of the most compelling arguments presented is that fluctuations in the COSI, often triggered by shifts in market fundamentals such as supply disruptions, changes in legislation, or geopolitical events, can signal upcoming price trend changes well before these are reflected in futures markets. This leads to the provocative claim that traditional futures markets, long considered the gold standard for price forecasting, may lag behind or even miss critical shifts altogether.
Interestingly, oil price shocks have been known to contain information of key relevance to monetary policy and can be used to guide monetary policy during periods of rapid change, such as the COVID-19 pandemic and the Russia-Ukraine war, as daily data easily outpaces lagged monthly data that is often used by policymakers (Gazzani, Venditti, and Veronese 2024). The turn of the decade has been marked by significant shifts in oil prices driven by macroeconomic and geopolitical shocks, such as COVID-19 policies, global inflation, military conflicts, and sanctions on major oil producers.
As shown in Figure 1, the primary downward trend – induced by the breakout of the COVID-19 pandemic – was reversed in the second half of April 2020. As oil demand projections rebounded during the subsequent months, oil prices were trending up, culminating in the melt-up of February-March 2022, which was induced by the start of the Russia-Ukraine conflict and the subsequent sanctions. However, as the global oil market began rebalancing under the new realities, the price shock subsided, triggering a new downward trend until the end of 2022. Despite several factors that could have had a significant impact on the oil price direction, including increasing sanction pressure, geopolitical escalation in the Middle East, and disruption of supply routes, the prices have remained rangebound ever since, demonstrating sideways dynamics with descending fluctuations since Q4 2023.