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Does excess futures market demand affect the spot price of oil?

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  • DeCoste, Joseph

Abstract

In this paper, I find novel evidence that excess demand in futures markets drives over half of the short run variation in the spot price of oil, and can explain a number of puzzling incidents of oil price behavior. Specifically, I find a major role for excess demand during the 2008 global financial crisis and the 2014 oil price crash. This relationship is much stronger after 2003, the period which is commonly associated with a rise in financialization and commodity index investment. These results are obtained using a novel sign restricted vector autoregressive oil market model that explicitly includes futures markets. The model allows for the detection of futures demand effects which feedback into spot prices through a price signaling channel, in contrast to previous studies relying solely on an assumed inventory response.

Suggested Citation

  • DeCoste, Joseph, 2025. "Does excess futures market demand affect the spot price of oil?," Energy Economics, Elsevier, vol. 149(C).
    • Handle: RePEc:eee:eneeco:v:149:y:2025:i:c:s0140988325004487
    DOI: 10.1016/j.eneco.2025.108621
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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