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Do oil futures prices help predict future oil prices?

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Author Info

  • Tao Wu
  • Andrew McCallum

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.

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Bibliographic Info

Article provided by Federal Reserve Bank of San Francisco in its journal FRBSF Economic Letter.

Volume (Year): (2005)
Issue (Month): dec30 ()
Pages:

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Handle: RePEc:fip:fedfel:y:2005:i:dec30:n:2005-38

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Related research

Keywords: Petroleum products - Prices ; Petroleum industry and trade ; Economic forecasting;

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Cited by:
  1. Tao Wu & Michele Cavallo, 2009. "Measuring oil-price shocks using market-based information," Working Papers 0905, Federal Reserve Bank of Dallas.
  2. Bahel, Eric, 2011. "Optimal management of strategic reserves of nonrenewable natural resources," Journal of Environmental Economics and Management, Elsevier, vol. 61(3), pages 267-280, May.
  3. Menzie D. Chinn & Olivier Coibion, 2010. "The Predictive Content of Commodity Futures," Working Papers 89, Department of Economics, College of William and Mary.
  4. Alquist, Ron & Kilian, Lutz, 2007. "What Do We Learn from the Price of Crude Oil Futures?," CEPR Discussion Papers 6548, C.E.P.R. Discussion Papers.
  5. Ron Alquist & Lutz Kilian & Robert J. Vigfusson, 2011. "Forecasting the Price of Oil," Working Papers 11-15, Bank of Canada.
  6. Ashima Goyal & Shruti Tripathi, 2012. "Regulations and price discovery: oil spot and futures markets," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2012-016, Indira Gandhi Institute of Development Research, Mumbai, India.
  7. Nixon, Dan & Smith, Tom, 2012. "What can the oil futures curve tell us about the outlook for oil prices?," Bank of England Quarterly Bulletin, Bank of England, vol. 52(1), pages 39-47.
  8. Tao Wu & Michele Cavallo, 2007. "Measuring oil-price shocks using market-based information," 2007 Meeting Papers 953, Society for Economic Dynamics.
  9. Kuper, Gerard H., 2012. "Inventories and upstream gasoline price dynamics," Energy Economics, Elsevier, vol. 34(1), pages 208-214.

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