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Fundamental and Financial Influences on the Co-movement of Oil and Gas Prices

Derek Bunn, Julien Chevallier, Yannick Le Pen, and Benoit Sevi

Year: 2017
Volume: Volume 38
Number: Number 2
DOI: 10.5547/01956574.38.2.dbun
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Abstract:
As speculative flows into commodity futures are expected to link commodity prices more strongly to equity indices, we investigate whether this process also creates increased correlations amongst the commodities themselves. Considering U.S. oil and gas futures, we investigate whether common factors, derived from a large international data set of real and nominal macroeconomic variables by means of the large approximate factor models methodology, are able to explain both returns and whether, beyond these fundamental common factors, the residuals remain correlated. We further investigate a possible explanation for this residual correlation by using some proxies for trading intensity derived from CFTC publicly available data, showing most notably that the proxy for speculation in the oil market increases the oil-gas correlation. We thus identify the central role of financial activities in shaping the link between oil and gas returns.



Informed Trading in the WTI Oil Futures Market

Olivier Rousse and Benoit Sevi

Year: 2019
Volume: Volume 40
Number: Number 2
DOI: 10.5547/01956574.40.2.orou
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Abstract:
The weekly release of the U.S. inventory level by the DOE-EIA is known as the market mover in the U.S. oil futures market. We uncover suspicious trading patterns in the WTI futures markets in days when the inventory level is released that are higher than market forecasts: there are significantly more orders initiated by buyers in the two hours preceding the official release of the inventory level, with a drop in the average price of -0.25% ahead of the news release. This finding is consistent with informed trading. We also provide evidence of an asymmetric response of the oil price to oil-inventory news, and highlight an over-reaction that is partly compensated in the hours following the announcement.





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