An Analysis of Intraday Market Response to Crude Oil Inventory Shocks

36 Pages Posted: 12 Jul 2018

See all articles by Richard Ziyuan Li

Richard Ziyuan Li

Johns Hopkins University - Department of Applied Mathematics and Statistics

Hélyette Geman

University of London - Economics, Mathematics and Statistics

Date Written: June 28, 2018

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).

Keywords: inventory shock, Energy Intelligence Agency (EIA) report, West Texas Intermediate (WTI) futures, price reversal, prereport trend-following strategies.

Suggested Citation

Li, Richard Ziyuan and Geman, Helyette, An Analysis of Intraday Market Response to Crude Oil Inventory Shocks (June 28, 2018). Journal of Energy Markets, Vol. 11, No. 2, 2018, Available at SSRN: https://ssrn.com/abstract=3205211

Richard Ziyuan Li

Johns Hopkins University - Department of Applied Mathematics and Statistics ( email )

3400 N Charles Street
Whitehead 100
Baltimore, MD 21218
United States

Helyette Geman (Contact Author)

University of London - Economics, Mathematics and Statistics ( email )

Malet Street
London, WC1E 7HX
United Kingdom

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