Joining pieces of the Black Gold Puzzle

A Data Analytics Project on Oil, Geopolitics and Renewables

The oil market has long been subject to cycles of boom and bust and data being a witness, periods of highs are often followed by periods of lows. In 2011, crude touched an all-time high of $118/Barrel however within 5 years, the price dipped to $43/Barrel in 2016. Such is the nature of oil industry and it is one industry, which affects all industries to a large extent.

It is not an easy task to predict oil price since it is more than just a function of basic demand and supply. Prices are also affected by crude oil reserves, geopolitical events and sentiment of producer consortiums like Organization of the Petroleum Exporting Countries (OPEC)among several other factors.

In reference to the time series relation of crude oil prices, it appears that the cyclicality of prices repeats itself in 20 to 25 years. Though the past may not exactly repeat itself, present does rhyme well with the past. This might be attributed to changes in demand growth, technological innovations and development of new sources of crude.

The year 2020 has been marked with higher than usual oil price volatility. The COVID-19 pandemic has led to decreased economic activity and demand slowdown in the world economy. Due to a global shutdown of industry, crude demand has fallen drastically and with shale oil production becoming more efficient and no signs of significant production cuts, the oil price has become increasingly volatile.

Now that companies were ready to pay money to get rid of oil due to lack of storage, hopefully they would exercise precaution in production, taking into account the dip in demand.

With the year opening at $67/Barrel and March ending below $15/Barrel, the box for 2020 is much wider compared to 2019 indicating a wider spread in oil prices. Data points within the plots lay tighter in 2019 while 2020 shows significantly higher volatility.

Since 2013, there has been a significant shift in the geopolitical landscape with the US becoming one of the major oil producing countries. Tension among oil producing countries may result in supply chain disruptions, which can lead to an increase in oil prices. Oil is a global commodity so whatever happens in the oil producing nations, prices are either tilted upward or downward.

There seems to be a negative relationship between geopolitical sentiment and crude price. This suggests that when tensions are high, the sentiment is negative and hence, oil price is high.

This effect can be seen in last year’s incident on January 28, 2019 when United States put sanctions on Venezuela, which prevented the country to export petroleum products to other parts of the world.

Before the event, based on 53 news articles from December 14, 2018 to January 13, 2019 from oilprice.com, the relationship between crude sentiment and price was positive.

However, in order to assess the impact of this geopolitical event, 67 news articles from January 14 to February 12, 2019 were analyzed to yield that in light of the sanctions, the relationship between crude sentiment and price became negative.

Basic logic suggests that low oil prices are perceived as bad news for the alternative energy space. This might be because lower oil prices mean that economic viability of alternative energy sources is severely challenged. Additionally, historical price crashes may be accompanied by a cut in spending by governments, which directly affects subsidies received by these producers.

The trendline shows a direct, but slight relationship between crude price and average sentiment, extracted from news articles based on alternative sources of energy. The slight relationship can be attributed to the movement towards “cleaner” energy sources and increasing competitiveness of the industry.

OPEC, Organization of the Petroleum Exporting Countries controls oil prices by enforcing production quotas among its affiliates. A positive sentiment in OPEC reflects a positive outlook for oil. Such announcements would most likely trigger a negative sentiment for renewable energy. The graph shows an inverse relationship between crude and alternative energy sentiment based on news articles from oilprice.com and CNBC.

The word cloud highlights words most widely used in articles when oil prices were high last year and in the beginning of 2020. During this period, large focus was given to solar, wind, nuclear, hydrogen fuel based clean processes to generate electricity and thereby, efficiently increasing capacity.

Based on Latent Dirichlet Allocation (LDA) analysis, there are a variety of prominent topics in news, in times when oil prices are at a high. Some of the topics include, Hydrogen fuel production, encouraging clean energy research at universities, solar and wind energy production and renewables related new expenditures in the industry.

Although this word cloud based on articles during the recent crude price crash has some of the usual words, greater emphasis is given to cost effective sources of energy like geothermal and tidal.

The LDA analysis yields interesting topics, offshore energy production, cost of projects and economic impact on renewable energy industry.

This shows how oil prices affect the topics being discussed in the renewable energy space. Clearly, low oil prices catalyze a deflection in the thought process and in such times, the focus is no more limited to sustainability and cleaner fuels. Energy efficiency and costs of alternatives become a larger part of the debate. Thus, clearly indicating that the recent crash may serve as the turning point of the alternative energy industry!

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