Publications: Notes at the Margin

Rethinking Market Fundamentals II (December 10, 2018)


In this report, we show again that three variables—stock changes, changes in open interest, and changes in volatility—explain crude price movements. The economic basis for this conclusion is solid. An increase in the amount of oil consumed has always been seen as a cause of price increases, as has a decrease in supply. In the same way, an increase in open interest must cause price increases because the rise in open interest (linked to greater buying and selling) is no different than a boost in current consumption. Our new econometric tests show that the increase in open interest is an important price determinant. Oil price volatility is also a critical price determinant, as explained in our December 3 report. There, we noted that models dictate that an increase in volatility requires an increase in futures sales (or purchases) to maintain delta neutrality. Our new econometric tests emphasize the importance of volatility as a price determinant.


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