Comparing the WTI Crude Oil spot prices of the last five years

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with WTI Futures prices for Nov'2020 over time, it seems that they mostly follow the current price. This seems to enable one to lock in the current price for future trades, but it that like with the weather, the collective market cannot predict the spot prices weeks in advance.

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Does this hold true for all other markets/derivatives?


3 Answers 3


The only time that prices of futures represent a nontrivial prediction of the future spot price of the underlying is in the case of backwardation with a shortage. Here the expectation is that a new increase in supply (or decrease in demand) will occur, but this cannot be arbitraged by trading the underlying, because the underlying -- e.g., a physical commodity -- cannot be directly shorted. The current spot price is being kept up by people who want to use the commodity now (e.g., to eat, drive, or heat their homes) and not wait for the expected future glut. However, precisely because the futures market accounts for this expectation, the prediction does not represent a profit opportunity.

Outside the shortage scenario, prices of futures "predict" future spot prices only in the same way that current spot prices predict future spot prices. After all, if futures are trading at a higher price because there is a consensus that supply will be lower (or demand higher) by expiration, then traders will also want to buy the underlying (whether physical or financial) and simply hold it. This will equilibrate through arbitrage until the difference between the current spot price and the price of futures reflects only the "carry cost" (interest and storage cost if any, minus any dividends paid by the underlying). That "carry cost" is a simple and stable calculation (and generally a small number) that does not involve any judgment or opinion about the underlying.

This is why, as you observe, futures "mostly follow the current price". Expectations of future supply and demand are already effectively incorporated into current supply and demand (spot prices) through the profit motive.


There are plenty of things with predictive power - accounting scandals, CEO mistress scandals, coronavirus, among others. If you're talking about a super-secret mathematical formula, probably not

Futures markets don't have predictive power because the prices of the futures are based on all publicly available data. The stock price is also based on all publicly available data. Futures markets allow you to buy and sell uncertainty over time. If there was predictive power, then the stock market wouldn't exist and everyone would trade futures.

Lots of things have predictive power - it's just hard to predict without insider information (a.k.a. insider trading). If one of these happens you can predict quite easily what will happen to the stock.

But I'm a genius and developed a super-secret math formula to make me rich

A Random Walk Down Wallstreet burst this bubble too. Being a genius won't help you. You're trying to predict the aggregated whims of millions of average people - people that like beanie babies and pet rocks.

Good luck making an equation that factors in scandals in companies, unforeseen events like coronavirus, and fickle consumers who buy things off of cute factors, and can be updated as new companies are added and removed from exchanges.

Even if you somehow had a magic formula to tell you the answer, and managed to keep it secret, your trades are public. Others watching the trades could simply follow along. No matter how predictive that formula was, it'll cease to be useful once everyone is buying and selling in lock-step. Then you'll need another formula that factors in the original formula and human actions.

EDIT for all the people saying, "but my fund has beat the market X years in a row"

Great - take a trip to Vegas and see if you can keep the hot streak going. Half the funds in existence will beat the market average because of the definition of average. It sounds difficult to win a random coin toss 5, 10, or 15 times in a row, but if you flip enough coins it'll happen.

Taking into account thousands of funds and survivorship bias (i.e. funds that do poorly go out of business), and most existing funds "beat the market" - it does not mean they will continue to do so.

But my fund has increased since I put money in it - doesn't that mean my super-smart broker is doing a good job!

Over the long term, the market is always rising (do not point out 2001, 2008, or any other time the market was way down - that's not the point of this answer). Simpling making investments, in general, will net you a return because of this fact. Remember - in the long-run we're all dead.

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    "A Random Walk Down Wallstreet burst this bubble too." - ,maybe.. A NON random walk, though leads you to Renaissance Technology and their Medallion fund having an average return in excess of 60% per year for a LOT of years. So, a lot of things are possible, if you are smart enough NOT to walk along wallstreet RANDOMLY, but start using your brain and the VERY VERY VERY hard work to make money.
    – TomTom
    Jan 20, 2021 at 16:04
  • Funds are just a simple scam. RenTech is a total flop: "The Renaissance Institutional Equities Fund, which launched in July of 2005, lost 22.62 percent through December 25, according to HSBC’s weekly scoreboard of hedge fund performance. A newer fund, Renaissance Institutional Diversified Alpha, fell even more: It fell 33.58 percent through the same time period, HSBC reported. Those two funds’ performance was so poor that they made HSBC’s top 20 losers list for 2020."
    – Fattie
    Jan 20, 2021 at 16:10
  • 3
    institutionalinvestor.com/article/b1q3fndg77d0tg/… "Renaissance Technologies’ famed Medallion fund, available only to current and former partners, had one of its best years ever, surging 76 percent, according to one of its investors. But it was a different story for outsiders who are only able to invest in other RenTec funds — two of which had their worst years ever."
    – Fattie
    Jan 20, 2021 at 16:11
  • A random walk down wall street covers this too - flip a coin a few thousand times and you'll get runs of 5, 10, or even 15 in a row... out of thousands of flips. As several others have pointed out, these funds usually can't replicate the results. Jan 20, 2021 at 16:16
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    Well the fund industry is a simple scam. You create a dozen funds. One does well so you advertise that one and just dump the rest. That's the whole story of "funds". It's just an advertising trick. Nothing beats an ordinary S&P index over long time scales. As 7x7 says, it's just survivorship bias. For years folks though Buffet could actually pick stocks, then he loses 100 billion (all he had to say was "gosh, it's hard to beat the S&P")
    – Fattie
    Jan 20, 2021 at 16:20

They have no predictive power, whatsoever.

Note that nothing known, has any proven reliable predictive power regarding markets.

Further, note that this has been tested "incredibly extensively" - the search for "something with reliable predictive power regarding markets" has been carried out for centuries using vast resources, and every single attempt has failed.

In the Isaac Asimov "Foundation" books, there's a fictional science which predicts future moves of things such as markets: however, that is just fiction.

In the real world it has been proven to the Nth degree that nothing offers reliable predictive power regarding markets.

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    You're going to lose a lot of money if you think you can't predict stuff like the S&P500 outrunning T bills over long time scales, or that a stock price tomorrow is more likely to be close to where it was yesterday than it was last year.
    – Philip
    Jan 20, 2021 at 15:54
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    Hmm, that comment makes little sense on a number of levels and does not seem to relate to the question at hand. Certainly "you can predict" with high probability (not certainty) that the sun will rise tomorrow. Regarding major markets, sure, you can make observations about the past such as "it's common that major markets like the Nikkei occasionally go straight down for 30 years." the question is about supposed inputs to predict the price movements of oil (or similar markets).
    – Fattie
    Jan 20, 2021 at 16:08
  • Both of these apply to oil just fine: you can easily predict that the s&p500 will outrun oil over 20 years or that oil tomorrow is extremely likely to be nearer its current price compared to its price 6 months ago. Both of these are perfectly legitimate predictive statements about liklihood of price that are also priced well by the respective options markets: if what you are saying is true taking on the extreme outlying options on the respective market would be highly profitable (as they are priced to be very unlikely), but it isn't, because your argument isn't right.
    – Philip
    Jan 20, 2021 at 17:57
  • Hmm, your "predictions" aren't. "you can easily predict that the s&p500 will outrun oil over 20 years" 100 million people said that about the Nikkei before it went straight down for 30 years. To make it simpler, looking at the actual question the OP wants predictive power in the 1-5 year time scale. If you have that, PLEASE tell me! :)
    – Fattie
    Jan 20, 2021 at 23:05
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    The Nikkei didn't go down for 30 years once you factor in the dividends paid over the period (might be worth actually learning about the basic mechanics of these things before having such strong opinions?). Both example I gave do just fine over shorter timescales: their respective probabilities just change (in s&p 500 example gets less likely to outrun in shorter periods, in the being close to today's price it becomes much more likely the closer you get in). Both are totally legitimate predictions of where price will be over x distance much more accurate than throwing darts.
    – Philip
    Jan 21, 2021 at 8:36

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