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Futures Prices are Useful Predictors of the Spot Price of Crude Oil

Abstract:
How well do futures prices forecast the spot price of crude oil? Contrary to the established view, futures prices significantly improve upon the accuracy of monthly no-change forecasts. This results from two innovations. First, we document that independent of the construction of futures-based forecasts, longer-horizon futures prices have become better predictors of crude oil spot prices since the mid-2000s. Second, we show that futures curves constructed using end-of-month prices instead of average prices have consistently been able to generate large accuracy-improvements for short-horizon forecasts of average prices. These findings are remarkably robust and apply to all major crude oil benchmarks.

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Keywords: Forecasting and prediction methods, Oil price forecast, Futures market

DOI: 10.5547/01956574.44.4.rell

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Published in Volume 44, Number 4 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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