To all investors that hold or have held oil/gas related investments since 2014, I can imagine your frustration. In the face of depressed oil prices reaching levels not seen in the last 15 years, oil companies have been slashing production, reducing costs, cancelling unprofitable projects and selling off assets in an attempt to maintain profitability and in some cases viability and for the investor, that means depressed portfolio valuations and the testing of patience. As oil prices have slid over the last 2 years, these corporate measures in addition to investor patience were some of the necessary actions required as we hope and wait for better times to come.
In the last six months, oil has appreciated from its lows of roughly $30 to its current mark of roughly $45, bringing along with it the remainder of the oil and gas market. In comparison to 2014, a considerable amount of supply has come off the table which will have repercussions in the oil price equilibrium, and hopefully for investors, that means an increase in price. The question then becomes; are we seeing the price move towards a higher equilibrium price? Is this the beginning of an oil rebound? As you can imagine, we’ve taken to Google Trends to give us a sense of market direction.
Using the thought process documented in this research report (http://www.nature.com/articles/srep01684) we assume that asset prices are a function of the aggregate of market participant’s sentiments, and that an increase in searches for our specially selected search term “price of oil” would result in a positive correlation with oil price volatility.
We reserved this space to specifically address concerns of statisticians and econometricians who at this point are probably yelling bloody murder. We get it, the above is subject to a lot of cherry picking/confirmation bias. (Searching through keywords until you get the right one that confirms your hypothesis.) We add that Investment decisions should never be based solely on Google Trends data, it simply establishes a base for further research and investigation.
With that out of the way, we observed that the best correlations between the price of brent crude and google searches for ‘price of oil’ existed when searches were isolated to regions significantly impacted by the price of oil. In this case we specifically focused in on the State of Texas and the Canadian Province of Alberta, two regions that are heavily involved in the production and refinement of crude oil. This Google Trends data was compared against two periods of significant Brent Crude Oil price volatility, June 2008 – January 2009 and June 2014 – January 2016. (See chart above)
Starting with the earliest episode, we noted that Brent Crude fell 75% over a period of 6 months. (From a high of $147set in July 2008 to a low of $36 set in December 2008). This corresponded with a spike in searches for ‘price of oil’ which began its ascent as early as April 2008 with searches ‘normalizing’ around February 2009, about the time where the price of oil rebounded to roughly $130. The next episode of price volatility was much longer in duration, where the same 75% decrease took place over nearly 20 months. (From a high of $115 set in June 2014 to a low of $28 set in January 2016.) This corresponded with a search spike that began its ascent in October 2014 and has yet to ‘normalize’ to levels prior to initiation of the spike.
If we were to take the 2008 episode as guidance, one would expect a decrease in price volatility upon the time that searches begin to normalize. Judging by the current heightened levels of searches, it would appear that price volatility still has some legs. A search trend count below the 25 level would suggest ‘normalization’ and a possible signal for price appreciation for Brent Crude.