Publications: Notes at the Margin

Rethinking Market Fundamentals (December 3, 2018)


Traditional fundamental analysis of oil markets involves barrel counting. Estimates of consumption are compared to estimates of supply. "Balances" are calculated. Price increases are projected if physical supply falls short of consumption. Price declines are predicted if supply exceeds consumption.


These calculations ignore the role of the futures market. Increases in open interest are equivalent to consumption increases, and changes in volatility are equivalent to supply increases. Failure to consider these factors will lead to forecasting errors. The recent price collapse demonstrates such a failure.


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