What do we learn from the price of crude oil futures?

Ron Alquist and Lutz Kilian

Journal of Applied Econometrics, 2010, vol. 25, issue 4, 539-573

Abstract: Despite their widespread use as predictors of the spot price of oil, oil futures prices tend to be less accurate in the mean-squared prediction error sense than no-change forecasts. This result is driven by the variability of the futures price about the spot price, as captured by the oil futures spread. This variability can be explained by the marginal convenience yield of oil inventories. Using a two-country, multi-period general equilibrium model of the spot and futures markets for crude oil we show that increased uncertainty about future oil supply shortfalls under plausible assumptions causes the spread to decline. Increased uncertainty also causes precautionary demand for oil to increase, resulting in an immediate increase in the real spot price. Thus the negative of the oil futures spread may be viewed as an indicator of fluctuations in the price of crude oil driven by precautionary demand. An empirical analysis of this indicator provides evidence of how shifts in the uncertainty about future oil supply shortfalls affect the real spot price of crude oil. Copyright © 2010 John Wiley & Sons, Ltd.

Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (503)

Downloads: (external link)
http://hdl.handle.net/10.1002/jae.1159 Link to full text; subscription required (text/html)
http://qed.econ.queensu.ca:80/jae/2010-v25.4/ Supporting data files and programs (text/html)

Related works:
Working Paper: What Do We Learn from the Price of Crude Oil Futures? (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:jae:japmet:v:25:y:2010:i:4:p:539-573

Ordering information: This journal article can be ordered from
http://www3.intersci ... e.jsp?issn=0883-7252

DOI: 10.1002/jae.1159

Access Statistics for this article

Journal of Applied Econometrics is currently edited by M. Hashem Pesaran

More articles in Journal of Applied Econometrics from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley-Blackwell Digital Licensing () and Christopher F. Baum ().