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

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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