Market timing, forecast ability and information flow in petroleum futures markets

Three petroleum futures contracts are examined over a ten-year period from 1986 to 1996. Intertemporal changes in futures prices and the net open interest positions of three trader types are compared to determine what, if any, market timing ability the traders have. Seasonal variation is considered and a simple trading rule is adopted to determine the dollar-return potential for market participation and shed light on issues of market efficiency.;This study utilizes a methodology proposed by Cumby and Modest (1985) and applied to futures markets by Hartz-mark (1991) and Leuthold, Garcia and Lu (1994). Forecast consistency is measured by univariate and multivariate logistical regressions and Henriksson-Merton's conditional probability estimation procedures. Forecast conviction is measured by univariate and multivariate OLS regressions modified by White's heteroskedasticity correction procedure.;The ten-year analysis allows examination of long cyclical patterns in crude oil futures and shorter seasonal patterns in heating oil and unleaded gasoline futures. Tests are conducted on each model's sensitivity to measurement interval, trader position and the coincidental observation of reported positions.;For all three petroleum futures contracts, univariate tests exhibit systematic evidence of a priori forecast power information in the net open interest position of large speculators. Of additional significance is the consistently perverse signal sent by the large hedger's position. Notably, nonreporting traders do not appear to play a significant role in the petroleum futures market.;Multivariate tests, on the other hand, indicate caution is warranted in concluding that returns to large speculators are due to superior information. The notion that a trader's position is determined independently is not supported. Seasonality does not appear to be a significant factor, though transaction costs do. Additional research is needed to advance the findings of this investigation.