Psychological Barriers and Price Clustering in Energy Futures

Abstract

WTI and Brent futures are tested for the presence of psychological barriers around $10 price levels applying a multiple hypothesis testing approach for robustness. Psychological barriers are present in Brent pricing but not in WTI pricing, which is argued, based on recent behavioural finance research, to be due to the greater uncertainty inherent in Brent fundamental value determination. Particularly Brent displays significant resistance when breaching from below a $10 barrier level. Similar patterns are present at the $1 barrier level for the WTI-Brent spread. A range of reaction windows are applied with the main finding being that the trading potential around such psychological barrier levels is primarily in the immediate 1-2 days following a breach. The research contributes to the scant existing research on psychological influences on energy market traders, and suggests strong potential for further application of behavioural finance theories to improving understanding of energy markets pricing dynamics.