Do net positions in the futures market cause spot prices of crude oil?

Abstract

The last decade has witnessed sharp increases in the price of crude oil. There are two possible explanations for these increases: dramatic increases in financial firms' position in the oil futures market and recent increases in oil prices from changes in economic fundamentals. This paper examines the causal relationship between the net financial position and the crude oil price by using three types of Granger non-causality tests: the classical Granger non-causality test, a robust Granger non-causality test and a Granger non-causality test in quantiles. The empirical results provide some evidence of causality from the net financial position to the spot price of crude oil. In addition, futures prices serve as a transmission mechanism underlying the causal relationship between the net financial position and the crude oil price.