TITLE:
Determinants of Oil Futures Prices
AUTHORS:
Rebecca Abraham, Charles Harrington
KEYWORDS:
Oil Futures, Options, Negative Volume, Price Declines
JOURNAL NAME:
Theoretical Economics Letters,
Vol.6 No.4,
August
10,
2016
ABSTRACT: This study is directed at predicting the determinants of oil futures
prices. We evaluate commodity pricing with oil occupying a special position due
to highly inelastic demand. Given the sudden fall in oil prices, there is
theoretical and practical interest in identifying the determinants of falling
oil prices. While the popular press dwells on oversupply in production as the
principal determinant of price declines, we
examine additional predictors including call option sales and put option
purchases along with the Canadian dollar-US dollar exchange rate and news of
future oil prices. Intraday call and put options on NYMEX oil futures were
examined. Call and put option prices of 1 - 7 month-maturities, along with exchange rates, the supply of oil and news of
oil prices were regressed on oil
futures prices. A trading strategy was tested based on the thesis that in a
period of price declines, options traders seek to profit by selling call
options and purchasing put options. While oversupply of oil was the most
important determinant of oil prices, trader speculation through put buying
and call selling exacerbated the decline in oil prices. Call and put option
prices explained oil futures prices for options of 1 - 4 month maturities. The
supply of oil was significant in predicting oil futures prices in all future
time periods. This was followed by the Canadian dollar-US dollar exchange rate
which was significant in predicting oil prices 1, 2, 3 and 6 months into the
future. Finally, news of forthcoming events affecting oil prices predicted oil
futures prices 3, 4, 5, 6 and 7 months in advance.