Abstract
This paper examines how changes in oil market conditions affect the link between spot and futures prices for oil and ways in which information about market conditions may be extracted from observation of futures trading. It is found that futures prices do not perform well as simplistic predictors of spot prices. A more sophisticated model of spot and futures prices is developed that emphasizes (1) the relationship between inventory demand and price behavior, and (2) the effect of supply shocks and inventory demand shocks on market performance. Comparison of the model's results with actual behavior in the market for No. 2 Heating Oil indicates that futures market activity can be useful as a guide for understanding how a disturbance is affecting the market. 12 refs., 6 figs., 4 tabs.
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