Speculation, Futures Prices, and the U.S. Real Price of Crude Oil
Lonnie K. Stevans
Hofstra University - Frank G. Zarb School of Business
David N. Sessions
Frank G. Zarb School of Business
July 2, 2008
American Journal of Social and Management Science, Vol. 1, No., pp. 13-23, September 2010
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, they should keep the shorter-term futures contracts and eliminate the more speculative six months futures contracts.
Number of Pages in PDF File: 11
Keywords: futures prices, cointegration, speculation, hoarding
JEL Classification: C32, G00, Q41Accepted Paper Series
Date posted: July 4, 2008 ; Last revised: February 23, 2011
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