Journal of Energy Markets
ISSN:
1756-3607 (print)
1756-3615 (online)
Editor-in-chief: Derek W. Bunn
Need to know
- The illustration of the persisting validity of the Theory of Storage of Kaldor (1939) and the key role of inventory
- The benefits of ‘natural’ strategies, namely long (short) put in place by market participants in response to a positive (negative) inventory created at 10h30am by the EIA announcement
- The evidence that some players have access to the news on inventory 10 minutes ahead of the announcement, either through their wireless towers or other systems, and strategies following their lead are remarkably profitable
- A wider belief dispersion implies a larger market response to inventory shock
Abstract
This paper investigates the intraday market activity of West Texas Intermediate (WTI) crude oil futures around the release of the US Energy Intelligence Agency (EIA) report, looking at how prices respond to inventory shocks. It also examines the impacts of belief dispersion and calendar effect as well as oil price movement between the releases of the American Petroleum Institute (API) and EIA reports. Market activity, in terms of price return, volatility and trading volume, responds to inventory shock very quickly, with the effects lasting for about twenty-five minutes. Our results suggest that a positive (negative) inventory shock will result in an immediate price decline (rise), while both kinds of shock increase volatility and trading volume; however, the price reverts quickly after the initial reaction. Moreover, wider belief dispersion is associated with a larger market response to inventory shock. Last, we discuss some intraday trading strategies on EIA report days. Interestingly, we exhibit an even better strategy than the “natural” one of going long (short) after the announcement of a lower-than-expected inventory at 10:30, that is, an alternate strategy that follows the market move between 10:20 and 10:25. This indicates that some market participants may benefit from wireless towers or other systems giving them access to the news prior to its release by the EIA (www.eia.org).
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