Trader positions and the price of oil in the futures market

The relationship between trader positions in the futures market and Brent oil’s one-month futures price is examined in the context of linear and Markov-switching vector autoregressions. We consider positions by producers, money managers and swap dealers on the Brent crude futures contract. The Bayesian information criterion is used to determine whether the additional regime in the Markov-switching setting is warranted by the data. In the presence of a second regime we quantify the impact of shocks to prices or positions using regime-dependent impulse responses. We find that producers and swap dealers reduce their net positions following a positive price shock, whereas money managers increase them. There is weaker evidence of Brent’s price reacting to shocks in trader positions.