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

American Journal of Social and Management Science, Vol. 1, No., pp. 13-23, September 2010

11 Pages Posted: 4 Jul 2008 Last revised: 23 Feb 2011

Lonnie K. Stevans

Hofstra University - Frank G. Zarb School of Business

David N. Sessions

Frank G. Zarb School of Business

Date Written: July 2, 2008

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, they should keep the shorter-term futures contracts and eliminate the more speculative six months futures contracts.

Keywords: futures prices, cointegration, speculation, hoarding

JEL Classification: C32, G00, Q41

Suggested Citation

Stevans, Lonnie K. and Sessions, David N., Speculation, Futures Prices, and the U.S. Real Price of Crude Oil (July 2, 2008). American Journal of Social and Management Science, Vol. 1, No., pp. 13-23, September 2010. Available at SSRN: https://ssrn.com/abstract=1154686

Lonnie K. Stevans (Contact Author)

Hofstra University - Frank G. Zarb School of Business ( email )

Department of IT/QM
134 Hofstra University
Hempstead, NY 11549
United States
516-463-5375 (Phone)

HOME PAGE: http://www.lonniestevans.com

David N. Sessions

Frank G. Zarb School of Business ( email )

Hempstead, NY 11549
United States
516-463-5719 (Phone)

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