Speculation, Futures Prices, and the U.S.Real Price of Crude Oil

In this study, we examine the relationship between the U.S. real price of oil and factors thataffect its movement over time: futures prices, the value of the dollar, exploration, demand, andsupply. All of these variables are treated as jointly endogenous and a reduced form vector errorcorrection model, testing for cointegration amongst the variables, is estimated. We find that formodel specifications with short-term futures contracts, supply does indeed dominate pricemovements in the crude oil market. However, for specifications including longer-term contractsthat are inherently more speculative, the real price of oil appears to be determined predominantlyby the futures price. Moreover, there is empirical evidence of hoarding in the crude oil market:both oil stocks/inventories and futures prices are found to be positively cointegrated/correlatedwith each other. From a policy perspective, the results of this analysis indicate that if regulatorsreally wanted to limit speculation in the oil market, it should keep the shorter-term futurescontracts and eliminate the more speculative six months futures contracts.