Speculation, Futures Prices, and the U.S. Real Price of Crude Oil

Lonnie Stevans and David Sessions

MPRA Paper from University Library of Munich, Germany

Abstract: In this study, we examine the relationship between the U.S. real price of oil and factors that affect its movement over time: futures prices, the value of the dollar, exploration, demand, and supply. All of these variables are treated as jointly endogenous and a reduced form vector error correction model, testing for cointegration amongst the variables, is estimated. We find that for model specifications with short-term futures contracts, supply does indeed dominate price movements in the crude oil market. However, for specifications including longer-term contracts that are inherently more speculative, the real price of oil appears to be determined predominantly by the futures price. Moreover, there is empirical evidence of hoarding in the crude oil market: both oil stocks/inventories and futures prices are found to be positively cointegrated/correlated with each other. From a policy perspective, the results of this analysis indicate that if regulators really wanted to limit speculation in the oil market, it should keep the shorter-term futures contracts and eliminate the more speculative six months futures contracts.

Keywords: futures prices; cointegration; speculation; hoarding (search for similar items in EconPapers)
JEL-codes: C32 G00 Q41 (search for similar items in EconPapers)
Date: 2008-07-02, Revised 2008-07-04
New Economics Papers: this item is included in nep-ene
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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