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An Analysis of the relationship between WTI term structure and oil market fundamentals in 2002-2009

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  • Cavalcante, Mileno

Abstract

The main objective of this paper is to analyze the behavior of the term structure of the WTI futures market between 2002 and 2009, period known by a sustained price rise followed by a price slump and again by a new price rise. To achieve this goal, we use Principal Component Analysis (PCA) to decompose WTI futures price series into components which are used to explain series variability (e.g. changes in its term structure). After it, we try to identify how changes in oil markets fundamentals (physical and financial) may have contributed to oil futures term structure variability. The impact of these variables on WTI term structure is assessed using impulse-response functions and variance decomposition analysis. This work is of interest to market analysts, hedgers, and traders, among others, because it helps to clarify how changes in oil markets may affect their strategies in these markets.

Suggested Citation

  • Cavalcante, Mileno, 2010. "An Analysis of the relationship between WTI term structure and oil market fundamentals in 2002-2009," MPRA Paper 24263, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:24263
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    References listed on IDEAS

    as
    1. Cavalcante, Mileno, 2008. "Preços do petróleo e bolhas especulativas: algumas evidências para o mercado de WTI [Crude oil prices and speculative bubbles: evidence from the WTI market]," MPRA Paper 28582, University Library of Munich, Germany.
    2. Keblowski, Piotr & Welfe, Aleksander, 2004. "The ADF-KPSS test of the joint confirmation hypothesis of unit autoregressive root," Economics Letters, Elsevier, vol. 85(2), pages 257-263, November.
    3. Charemza, Wojciech W. & Syczewska, Ewa M., 1998. "Joint application of the Dickey-Fuller and KPSS tests," Economics Letters, Elsevier, vol. 61(1), pages 17-21, October.
    4. Carrion-i-Silvestre, Josep Lluis & Sanso-i-Rossello, Andreu & Ortuno, Manuel Artis, 2001. "Unit root and stationarity tests' wedding," Economics Letters, Elsevier, vol. 70(1), pages 1-8, January.
    5. Chantziara, Thalia & Skiadopoulos, George, 2008. "Can the dynamics of the term structure of petroleum futures be forecasted? Evidence from major markets," Energy Economics, Elsevier, vol. 30(3), pages 962-985, May.
    6. Antonio Merino & Álvaro Ortiz, 2005. "Explaining the so‐called “price premium” in oil markets," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 29(2), pages 133-152, June.
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    More about this item

    Keywords

    WTI Term Structure; Principal Components Analysis; VARXs Models; Futures Pricing; Oil Market Fundamentals;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • Q49 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Other
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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