What Do We Learn from the Price of Crude Oil Futures?
Ron Alquist () and
Lutz Kilian ()
No 6548, CEPR Discussion Papers from C.E.P.R. Discussion Papers
Based on a two-country, two-period general equilibrium model of the spot and futures markets for crude oil, we show that there is no theoretical support for the common view that oil futures prices are good predictors of the spot price in the mean-squared error sense; yet under certain conditions there is support for the view that oil futures prices are unbiased predictors. Our empirical analysis documents that futures-based forecasts are biased and typically inferior to simple and easy-to-use forecasting methods such as the no-change forecast. This does not mean that there is no useful information in oil futures prices. We demonstrate that fluctuations in the oil futures basis are larger and more persistent than fluctuations in the basis of foreign exchange futures. Within the context of our theoretical model, this anomaly can be explained by the marginal convenience yield of oil inventories. We show that increased uncertainty about future oil supply shortfalls causes the basis to decline and precautionary demand for crude oil to increase, resulting in an immediate increase in the real spot price that is not necessarily associated with an accumulation of oil inventories. Our main result is that the negative of the basis may be viewed as an index of fluctuations in the price of crude oil driven by precautionary demand for oil. Our empirical analysis of this index provides independent evidence of how shifts in market expectations about future oil supply shortfalls affect the spot price of crude oil. Such expectation shifts have been difficult to quantify, yet have been shown to play an important role in explaining oil price fluctuations. Our empirical results are consistent with related evidence in the literature obtained by alternative methodologies.
Keywords: basis; crude oil; expectations; forecasting; futures market; precautionary demand; spot market; spread (search for similar items in EconPapers)
JEL-codes: C53 D51 G13 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (29) Track citations by RSS feed
Downloads: (external link)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at firstname.lastname@example.org
Journal Article: What do we learn from the price of crude oil futures? (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:6548
Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=6548
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ..
Series data maintained by (). This e-mail address is bad, please contact .