Energy futures as predictors
Many publications use energy futures as proxy measures for market expectations of future energy prices. Does this procedure make sense?
Consider the IMF's recent World Economic Outlook, which included a figure with futures a year ago, and in March. While futures a year ago indicated some decline, the most recent reading indicate persistently high prices.
Figure 1.20 from IMF WEO, April 2006.
A relevant question is whether futures are actually good predictors of future spot oil prices. The answer is not obvious -- for instance, for currencies futures aren't good predictors. In a paper assessing energy futures, coauthored with Olivier Coibion and Michael LeBlanc, I assessed whether the gap between the futures rate and current spot rate predicts the actual change in the spot oil price. Over the 1990-2004 period, we find that at 3 month, 6 month and one year horizons, regression of actual change on predicted yields coefficients of 1.2, 0.8 and 0.9, respectively. In no case can the null hypothesis of unbiasedness be rejected.
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