Extended Analysis Of Loose Energy Futures Together With Stocks Arbitrage

A reader of my article “An arbitrage merchandise betwixt liberate energy stocks in addition to futures” suggested that I should hold off at a longer history of unsmooth crude oil prices vs. XLE. So I performed the same cointegration analysis for the front-month unsmooth crude oil futures contract CL vs. XLE since Dec 1998. (I piece of occupation CL instead of QM, the mini unsmooth crude oil contract, due to its longer history.) Here is the plot of the dollar value of long ane contract of CL in addition to brusk 1,217 shares of XLE. (My previous analysis called for ane contract of QM vs. 640 shares of XLE. The divergence inwards shares is due to the half-size of QM relative to CL, in addition to likewise to the larger dataset here.)

An interesting characteristic emerged from this extended analysis. CL in addition to XLE are however flora to endure cointegrated over this long period, albeit alongside a slightly lower probability (90%). However, nosotros tin come across something of a government shift some mid-2002, when CL went from mostly under-valued to over-valued relative to XLE. (Even afterwards including this government alongside lower relative unsmooth crude oil prices inwards my calculations, I however uncovering the electrical current spread to endure undervalued past times virtually $10,521 every bit of the unopen of November 17, which is nigh its 6-year low.)

What was the argue for this apparent shift inwards mid-2002? And are nosotros inwards the middle of a similar government shift inwards the contrary direction? Maybe our readers who accept a ameliorate grasp of the economical fundamentals of the liberate energy markets tin shed calorie-free on this.