Trading Momentum in the U.S. Crude Oil Futures Market

Abstract

This paper investigates if the Rate of Change (ROC), as a popular measure of momentum, can serve as a reliable technical analysis indicator to improve stock price prediction for U.S. West Texas Intermediate (WTI) crude oil futures market.  The methodology centers on the application of the ROC and/or Moving Average (MA) price crossover/cross under strategies as a trading system.  End of month futures prices of West Texas Intermediate (WTI) crude oil prices are collected for the period 28th May 2004 – 30th April 2024.  The performance of the trading system is measured using both the Sharpe and Sortino ratios, thereby adjusting for total and downside risks.  The model is also benchmarked against the naïve buy-and-hold strategy.  Overall findings suggest a ROC based on 14-month periods outperform other momentum-based indicators, including when combined with price-crossover moving average strategies, and the naïve buy-and-hold strategy.  After adjusting for the negative returns, the downside risk or semi-deviation amounted to 8.5%, and a Sortino value of 4.58.  The Sortino value is however biased due to the 295% return witnessed in 2009.  Findings have some vital policy implications for regulatory bodies and traders in the WTI crude oil energy futures market.