Abstract
This study investigates the changing relationship between price and volume traded of short- and long-maturity NYMEX light sweet crude oil futures contracts and major changes in the physical crude oil market during the last decade. Monthly series for the #1-month to 84-month out maturity contracts are generated from daily price and volume data for NYMEX West Texas Intermediate (WTI) futures contracts for the period from January 2000 to the middle of 2009. 3-D graphical analysis of the futures prices, contract volumes, maturity dates, and time is used to demonstrate the changing trading volume pattern and evolution of the shape of futures price term structure across various contract maturities in different market regimes. The study observes the impacts of both May 2004, when excess production capacity reached nearly zero, and September 2006, when electronic trading was implemented on the NYMEX WTI futures markets. This analysis will be used to determine if futures contract information can provide an early indication of market regime shifts and improve short-run crude oil spot price forecast models.
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Notes
Much research has been devoted to the comparison of the markets before and after the introduction of electronic trading in terms of various market efficiency measures. See for example, Evans (2006) on UK financial futures; Skouratova et al. (2008) on market quality changes measured by changes in volume, bid-ask spread, price clustering, price discovery, and market depth in crude oil futures; Tse and Xiang (2005) analyzed e-mini energy futures; Fung et al. (2005) on the Hang Seng Index futures; and Gilbert and Rijken (2006) on LIFFE FTSE 100.
Trading terminates at the close of business on the third business day prior to the 25th calendar day of the month preceding the delivery month. If the 25th calendar day of the month is a non-business day, trading shall cease on the third business day prior to the business day preceding the 25th calendar day. The contract termination schedule is available at www.nymex.com.
In other words, let F(k, t) be the spread with k month maturity in month t, where k = 1 to 84, and t = January 2000 to June 2009. We have
$$ F\left( {k,\,t} \right) = P\left( {k,t} \right)-P\left( {1,t} \right) $$or \( = 0\;\,if\,P\left( {k,t} \right) \) is not available in the end of the price term structure.
For those contacts which are not traded, F(k, t) is interpolated from the nearest available maturity prices. However, for presentation purposes, contacts with maturities longer than the longest traded contract have the price set to zero.
See also Fig. 8 below for typical normal, transitional and inverted futures price term structure.
Log values are used to visually diminish the huge differences in volume between short maturity contracts and long maturity contracts. For 3-D graphs, there are tradeoffs between most informative rotation angle and easiest reading of the axis directions. The graphs are most informative when shown in rotation.
Note that dark blue indicates 10s of contracts; light blue indicates 100s of contracts; whereas yellow indicates 10,000s of contracts and orange indicates 100,000s of contracts traded during the month.
Let V head(t) be the cumulative volume from contract maturity of 1 month up to the kth month, or
\( {V_{head}}(t) = \sum\limits_{k = 1}^{{K_{head}}} {V(k,\;t)} \); and the percentage share of the head be θ(t) in month t, or \( \theta (t) = \frac{{{V_{head}}(t)}}{{V(t)}} \). (Note that Khead is fixed and θ(t) changes over time.)
Detailed regression results for seasonality and trend are available to interested readers.
Detailed Granger causality test results are available to interested readers.
Recalling from footnote 7, we have \( {\theta_{head}} = \sum\limits_{k = 1}^{K(t)} {\frac{{V(k,\;t)}}{{V(t)}}} \).
(Note that θ head is fixed but K(t) changes over time).
The uses of the terms contango (normal shape) and backwardation (inverted shape) can be confusing. There are people who use them correctly and those use them “incorrectly.” See Harper’s article entitled “Contango vs. Normal Backwardation” at http://www.investopedia.com/articles/07/contango_backwardation.asp.
Several papers are identified in the literature. For example, Ma (1989) directly addresses the issue of use information on futures to forecast spot price, and Chantziara and Skiadopoulos (2008) try to forecast the term structure of petroleum futures. Hassan (1995) tested the relationship between futures prices and expected future spot prices. For studies on price spread and terms structure, see also, Geman (2008) and Bessembinder, et al. (1995).
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The views expressed are those of the authors, and do not necessarily reflect those of the Energy Information Administration. Authors also would like to acknowledge their sincere appreciation to Judi West for her patience and capability in processing the original huge and messy dataset.
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Ye, M., Zyren, J., Shore, J. et al. Crude Oil Futures as an Indicator of Market Changes: A Graphical Analysis. Int Adv Econ Res 16, 257–268 (2010). https://doi.org/10.1007/s11294-010-9266-z
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DOI: https://doi.org/10.1007/s11294-010-9266-z