The Financialization of Crude Oil Markets and Its Impact on Market Efficiency: Evidence from the Predictive Ability and Performance of Technical Trading Strategies

Cristiana Tudor,Andrei Anghel

doi:10.3390/en14154485

Abstract

Oil price forecasts are of crucial importance for many policy institutions, including the European Central Bank and the Federal Reserve Board, but projecting oil market evolutions remains a complicated task, further exacerbated by the financialization process that characterizes the crude oil markets. The efficiency (in Fama’s sense) of crude oil markets is revisited in this research through the investigation of the predictive ability of technical trading rules (TTRs). The predictive ability and trading performance of a plethora of TTRs are explored on the crude oil markets, as well as on the energy sector ETF XLE, while taking a special focus on the turbulent COVID-19 pandemic period. We are interested in whether technical trading strategies, by signaling the right timing of market entry and exits, can predict oil market movements. Research findings help to confidently conclude on the weak-form efficiency of the WTI crude oil and the XLE fund markets throughout the 1999–2021 period relative to the universe of TTRs. Moreover, results attest that TTRs do not add value to the Brent market beyond what may be expected by chance over the pre-pandemic 1999–2019 period, confirming the efficiency of the market before 2020. Nonetheless, research findings also suggest some temporal inefficiency of the Brent market during the 1 and ¼ years of pandemic period, with important consequences for energy markets’ practitioners and issuers of policy. Research findings further imply that there is evidence of a more intense financialization of the WTI crude oil market, which requires tighter measures from regulators during distressed markets. The Brent oil market is affected mainly by variations in oil demand and supply at the world level and to a lesser degree by financialization and the activity of market practitioners. As such, we conclude that different policies are needed for the two oil markets and also that policy issuers should employ distinct techniques for oil price forecasting.

Highlights

Over the last decades, the oil market registered significant growth, becoming the world’s biggest commodity market and transforming from a purely physical to a highly sophisticated and complex financial market [1]
As a means of extending previous literature, this paper has analyzed the profitability of a significant number of simple moving average (SMA) technical trading rules (TTRs) on a wider range of energy markets and a period that includes the ongoing COVID-19 pandemic
To the best of our knowledge, this is the first research attempt to investigate the effectiveness of technical indicators on both main crude oil markets, as well as on a relevant energy exchange traded fund, in comparative perspective between the pre-COVID-19 pandemic and the pandemic period

Summary

Introduction

The oil market registered significant growth, becoming the world’s biggest commodity market and transforming from a purely physical to a highly sophisticated and complex financial market [1]. Oil price forecasts are of crucial importance for macroeconomic projections, which is especially explained by the impact that oil prices have on inflation and output and, on the issuance of monetary policy. Oil derivatives markets have expanded over the last decades, with the presence of purely financial practitioners (institutional investors such as hedge funds, pension funds, insurance companies, and individual traders) with no interest in the physical commodity becoming more prominent. All these developments in oil markets have a direct impact on the oil market movements, its efficiency and subsequent predictability

Methods

Results

Conclusion