Our original pricing model states that a share price, for example, that of ConocoPhillips, COP(t), can be approximated by a linear function of the difference between the core CPI, coreCPI, and headline CPI:
COP(t) = A + B (coreCPI - CPI(t)) (1)
where A and B are empirical constants; t is the elapsed time. Here we extend the set of defining indices by the consumer price index of energy, eCPI, and the producer price index of crude petroleum, pPPI, together with the overall PPI. Thus, we test the following models for the period between 2001 and 2011:
COP(t) = A1 + B1(coreCPI - eCPI(t)) (2)
COP(t) = A2 + B2(pPPI - PPI(t)) (3)
Figures 1 through 3 compare the original and new predictions for COP. Coefficients in (1) through (3) are given in Figure captions. The best model for the period between 2001 and July 2011 is based on the index of energy and core CPI. Practically the same accuracy is associated with the original model as based on the core and headline CPI. At the same time, model (3) based on the producer price indices is the worst and has failed to predict the amplitude of the largest oscillation in 2008.
We have predicted oil price to fall through 2016. In 2011, we expect oil price to fall down to $70 per barrel. Considering these short- and mid-term predictions one can conclude that ConocoPhillips share price will be falling as well.
Figure 1. The observed COP price and that predicted from the core and headline CPI. A=75, B=-5.5.
Figure 2. The observed COP price and that predicted from the core CPI and the consumer price index of energy. A1=58, B1=-0.54.
Figure 3. The observed COP price and that predicted from the overall PPI and the producer price index of crude petroleum (domestic production). A2=45, B2=-0.3.