Fri May 19th, 2006 at 10:04:30 AM EST
A lot of people seem to think that oil futures give a good indication of future oil prices, apparently believing in the "wisdom of crowds".
Menzie Chinn (who is a real economist) on Econbrowser looked at that idea:
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.
So they're not very good at predicting prices. In fact, he goes on to say that they're not much better than a random walk would be.
One caveat to this conclusion is that our results only apply to horizons of up to one year. The markets further out on the maturity spectrum are very thin, and the characteristics of these futures are unknown.