| dc.description.abstract | This study is directed at predicting the determinants of oil futures prices. We evaluate commodity
pricing with oil occupying a special position due to highly inelastic demand. Given the sudden fall
in oil prices, there is theoretical and practical interest in identifying the determinants of falling oil
prices. While the popular press dwells on oversupply in production as the principal determinant
of price declines, we examine additional predictors including call option sales and put option purchases
along with the Canadian dollar-US dollar exchange rate and news of future oil prices. Intraday
call and put options on NYMEX oil futures were examined. Call and put option prices of 1 - 7
month-maturities, along with exchange rates, the supply of oil and news of oil prices were regressed
on oil futures prices. A trading strategy was tested based on the thesis that in a period of price declines,
options traders seek to profit by selling call options and purchasing put options. While oversupply
of oil was the most important determinant of oil prices, trader speculation through put buying
and call selling exacerbated the decline in oil prices. Call and put option prices explained oil
futures prices for options of 1 - 4 month maturities. The supply of oil was significant in predicting
oil futures prices in all future time periods. This was followed by the Canadian dollar-US dollar
exchange rate which was significant in predicting oil prices 1, 2, 3 and 6 months into the future.
Finally, news of forthcoming events affecting oil prices predicted oil futures prices 3, 4, 5, 6 and 7
months in advance. | en_US |
