Forecasting the trends of global oil price based on CMI-model of economic cycles

This paper presents author's method to forecast price trend direction for crude oil based on CMI-model of business cycles. As crude oil is included in CRB-index, which is the average weighted prices for 19 raw materials, the price dynamics for crude oil and the index is mainly unidirectional. Therefore, the method to forecast crude oil price, which is proposed here, can be also used for CRB-index forecasting. The price trend is determined by aggregate demand, which, in turn, depends on economic growth rate, and on the phase of the U.S. business cycle. According to CMI-model, phases of business cycles are determined by the value of cumulative market imperfection for the U.S. economy (∆P). Two rules to forecast the price trend for crude oil or for CRB-index are proposed: 1) yearly price decreases between minimum and maximum values of ∆P; 2) yearly price increases between maximum and minimum values of ∆P. These rules underwent empirical testing for the time period of 1975-2017 using yearly data for the crude oil (at NYMEX, ICE). We also demonstrated empirically that relationship between phases of the U.S. business cycles and turning points for CRB-index dynamics is of critical importance for the accurate forecasting of Ukrainian business cycle. Using the US economy data, it was demonstrated that the effect of the crude oil price rise on economic growth rate depends rather on the phase of business cycle (on its critical points location), than on the absolute value of this price. As long as an economy does not reach the point of ∆P minimum (by CMI-model), crude oil price may reach its historical maximum many times without triggering a recession. At the same time, if an economy passes the point of ∆P minimum, any even comparatively small external shock will trigger a recession (even if crude oil price does not reach its historical maximum). The US economy passed through the point of local maximum starting from the fourth quarter of 2017. It means that an upward price trend for crude oil (CRB-index) has formed and will cause further acceleration of the US economy growth rate (peak of this acceleration will be reached when ∆P=0). One can expect that the upward price trend for main raw materials will last until the next US recession (until the value of ∆P become negative). Herewith, growth rates for the crude oil price are expected 1,5-2 times higher than nowadays just 6-12 months before the recession starting point (i.e. when ∆P→0). According to pessimistic scenario, the US recession may occur as early as in 2020-21. Therefore, Ukrainian economy may be growing with a rate equal to the growth rate of prices for raw materials within at least 2-3 years. However, such favorable external factors for Ukrainian economy cannot last for a long time. If the peak of payments of the national debt coincides with the US recession bottom (local minimum point), some major problems for Ukrainian economy may occur. In this case, prices for raw materials may drop by 50% and more, as a result of another exchange crash all over the world. This crash would increase significantly the probability of a new recession in Ukraine that would shorten substantially budget revenues into the national economy. Therefore, it makes sense nowadays, while monitoring the US economy conditions, to plan certain actions to provide a soft landing for the national economy in case of a global exchange crash.