Psychological barriers in oil markets: Some research evidence

Screenshot 2016-01-12 07.57.38With the recent collapse in oil, this may be of interest. A research paper (co-authored with two other colleagues) and published in Energy Economics . Full paper available here . Given that the ppb is heading down towards and perhaps through 30$ what might we expect?

 

Screenshot 2016-01-12 07.58.06

 

WTI and Brent futures are tested for the presence of psychological barriers around $10 price levels, applying a multiple hypothesis testing approach for statistical robustness. Psychological barriers are found to be present in Brent prices but not inWTI prices,which is argued to be due to the more prominent role that Brent plays as a global bencchmark and, based on recent behavioural finance research, the greater complexity inherent in Brent fundamental value determination.

Brent particularly displays evidence that when breaching a $10 barrier level from below with rising prices, the trend is for prices to fall on average subsequently. Similar behavioural-based patterns are evidenced at the $1 barrier level for the WTI–Brent spread. We show that psychological barriers only appear to influence prices in the pre-credit crisis period of 1990–2006, with such effects dissipating during the crisis and as markets reverted back to wider economy focused fundamentals.

A range of reaction windows are applied with the main finding being that the trading potential around such psychological barrier levels is primarily in the immediate 1–5 days following a breach. The research contributes to the scant existing research on psychological influences on energy market traders, and suggests strong potential for further application of behavioural finance theories to improving understanding of energy markets price dynamic

Source: Psychological barriers in oil futures markets

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