Whether the oil futures prices curves along the time to maturity (term structure) are upward (i.e. contango) or downward (i.e. backwardation) sloping is important for both academics and practitioners. On the one hand, the shape of oil futures curve determines the gain or loss when hedgers extend the prices protection in the future by shifting from nearer-to-maturity contracts to farther-to-maturity ones. On the other hand, the upward or downward sloping oil futures curves are also more relevant for the performance of oil futures investment, which has gradually become a distinct asset class as an important complement to equities and bonds and drawn a large amount of capital. / This study first investigates the oil futures price dynamics, especially on the term structure of oil futures contracts, in a relatively long sample period from late 1980s to early the year 2010. In contrast with the traditional view on the oil futures investment, the importance of rolling yields in oil futures investing fluctuates in a significant magnitude, especially in recent years. The backwardation shape of oil futures curve is not as persistent as it was in earlier periods, and the probability of contango has increased a lot in most recent years. During the whole sample period, backwardation and contango approximately have happened at odds 50-50. / Furthennore, based on the existent possible explanations of oil futures term structure, this study provides a more fundamental view, which has a theoretical support from the theory of storage and well-suited intuitions in correspondence with reality. By using structural econometrical models, it divides oil net demand into two components: one is contributed by permanent shocks and the other is contributed by transitory shocks, and finds that only transitory component in oil net demand has a significant impact on oil futures term structure. Positive transitory shocks push oil futures curve from contango to backwardation and negative transitory shocks pull oil futures curve back to contango from backwardation. This study also applies the analysis framework to OECD and Non OECD countries, respectively, to address the rising importance of emerging markets in the dynamics of world oil prices and futures term structure. / The conclusions of this study have many implications for real investment on oil futures from several perspectives. First, the demand/supply perspective and decomposition help us understand fundamentally the structure of returns on oil futures investments, as well as their correlations with other asset class, such as equities and bonds, and perform a more efficient asset allocation. Second, this study provides a basic guideline for oil prices hedgers in both long side and short side. The fundamental view helps them optimize their hedging strategies in the sense of proper term selection. Third, this study highlights the probability that analyzing oil demand and supply dynamics accurately and timely can help us judge the changing trend of oil futures curves in advance and discover mispricing and arbitrage opportunities accordingly.
| Identifer | oai:union.ndltd.org:CHENGCHI/U0003500804 |
| Creators | Zha, Xiaolei. |
| Publisher | The Chinese University of Hong Kong (Hong Kong). |
| Source Sets | National Chengchi University Libraries |
| Detected Language | English |
| Type | text |
| Rights | Copyright © nccu library on behalf of the copyright holders |
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