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Do Oil Futures Prices Help Predict Future Oil Prices?

FRBSF Economic Letter No. 2005-38

4 Pages Posted: 3 Dec 2011  

Andrew H. McCallum

Federal Reserve Board

Tao Wu

Federal Reserve Bank of Dallas; Federal Reserve Bank of San Francisco

Date Written: December 30, 2005

Abstract

The price of oil has risen by about 60% since mid-2004 and by more than 40% since the beginning of 2005. Though the U.S. economy has apparently absorbed this supply shock well so far, the path of future oil prices remains a concern for monetary policymakers. Higher oil prices can damp demand, as consumers and firms spend more of their budgets on oil-related products and less on other goods and services. Furthermore, if higher oil prices are passed through to a significant extent to other goods and services and ultimately wages, inflationary pressures can build. ; Is the price of oil likely to rise further, or will it decline gradually, as it did in the mid-1980s? A natural place to look for an answer is in the markets, where oil traders are knowledgeable about the industry and where their profits ride on making sound investments. This Economic Letter discusses how to forecast future oil price movements based on information from both the oil futures market and the spot market. In particular, we conduct a series of forecasting exercises and compare the performance of models that use oil futures and spot prices in an attempt to find the one that performs best.

Keywords: crude oil, forecasting, futures market, spot market

JEL Classification: C52, E37, G13, Q43

Suggested Citation

McCallum, Andrew H. and Wu, Tao, Do Oil Futures Prices Help Predict Future Oil Prices? (December 30, 2005). FRBSF Economic Letter No. 2005-38. Available at SSRN: https://ssrn.com/abstract=1967966 or http://dx.doi.org/10.2139/ssrn.1967966

Andrew McCallum (Contact Author)

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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

Tao Wu

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

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