The impact of fundamental and financial traders on the term structure of oil

Abstract

We study how the exposure of fundamental and financial traders affects the futures curve of WTI oil and the market integration between WTI and Brent as measured by their price spread. To obtain a parsimonious representation of the futures curve, we decompose it into a level-, a slope-and a curvature factor. In a second step, we separately regress each extracted factor on measures of the market exposure of fundamental and financial traders revealing whether and how the exposure of the two trader groups affects the different dimensions of the futures curve. Spanning from 2006 until 2012, our dataset covers sub-periods of a sharp WTI-price rise as well as a diverging Brent-WTI-spread. Our contribution is threefold: First, we suggest that it is important to distinguish between level and slope as we find that fundamental traders have a measurable impact on the level of the futures curve, but do not play much of a role for its slope or curvature, whereas the exposure of financial traders mainly influences the slope of the futures curve. Despite allegations to the contrary, we find no evidence of a systematic impact of non-fundamental traders on the level of the futures curve, for example during the 2006-2008 oil price surge. Second, we suggest using relative short-and relative long positions for fundamental and financial traders instead of the net position as the former reflect better the overall group exposure and yield more significant results. Third, we find that the exposure of financials is the key driver of the Brent-WTI spread. It confirms that financial rather than fundamental traders are responsible for integrating the two markets.

The WTI/Brent oil futures price differential and the globalisation-regionalisation hypothesis

“…Our results agree withBüyükşahin et al (2013), who illustrate that the predictability of the WTI/Brent oil futures differential arises from both financial and physical traders' activity. In addition, our findings partly agree withHeidorn et al (2015), who emphasise the relative importance of financial traders relative to fundamental traders in predicting the oil futures differential.…”

“…Studies related to the determinants of the oil futures differential include papers by Heidorn et al (2015), Büyükşahin et al (2013) and Milonas and Henker (2001). Specifically, Milonas and Henker (2001), who use various regression models to examine the relation among the WTI/Brent oil futures differential, convenience yield and supply and demand for both WTI and Brent crude oil.…”

“…Furthermore, Heidorn et al (2015) use a term structure model on weekly data to investigate the impact of fundamental and financial traders' market positions on the Brent/WTI oil futures differential for a range of different maturities. They find that financial rather than fundamental traders tend to exercise a significant influence on WTI/ Brent market integration by eliminating price differences between them.…”

The WTI/Brent oil futures price differential and the globalisation-regionalisation hypothesis

“…Studies related to the determinants of the oil futures differential include the papers by Heidorn et al (2015), Büyükşahin et al (2013) and Milonas and Henker (2001). Specifically, Milonas and Henker (2001) who use various regression models to examine the relation among the WTI/Brent oil futures differential, convenience yield, supply and demand for both WTI and Brent crude oil.…”

Does Cadre Turnover Help or Hinder China’s Green Rise? Evidence from Shanxi Province

“…In the second sector, the leadership's efforts to clean coal hinge on scaling up coal mining and coking operations and promoting the establishment of "circular economies" (xunhuan jingji 循环经济) in which industrial waste is used as inputs for other processes. 93 Xiaoyi is also actively promoting local manufacturing. The large-scale LED project described above has received strong backing from local government because LED lights use much less energy than conventional 87 Xiaoyi City People's Government, "Chuangzao sheng ji huanbao mofan chengshi gongzuo baogao zhonggong xiaoyi shiwei, xiaoyi shi renmin zhengfu" ("Work report on creation of a provincial-level environmental protection model city 'CPC Xiaoyi City"), p. 3. bulbs.…”