Welsh researchers develop new way to predict oil prices

Nation.Cymru staff

Researchers at Bangor University say they have found a simple but effective way of improving forecasts of global oil prices, particularly during periods of economic uncertainty.

The study, published in the Journal of the Operational Research Society, found that monitoring how closely stock markets around the world move together can provide a valuable clue about future oil price movements.

The research comes at a time of heightened volatility in energy markets, driven by geopolitical tensions, conflicts and concerns over global supply chains.

Led by Dr Chrysovalantis Vasilakis of Bangor University’s Albert Gubay Business School, the study examined whether a measure of global financial integration could improve traditional oil price forecasting models.

Working with Dr Cindy Wang of Peking University, researchers developed a new “global risk” indicator that tracks the extent to which major stock markets move in sync with one another.

According to the study, financial markets tend to become more closely aligned during major global shocks such as economic crises, wars and pandemics. Researchers found that incorporating this measure into forecasting models significantly improved their ability to predict oil price movements.

Dr Vasilakis said the findings suggested that relatively simple indicators could outperform more complex approaches.

“Predicting oil prices is notoriously difficult, but this research found a surprisingly simple way to do it better,” he said.

“Instead of complex models, just watch how closely stock markets around the world move together. When they suddenly synchronise, such as during financial crises, wars or pandemics, oil prices tend to follow.”

The study found that the most successful forecasting model correctly predicted the direction of monthly oil price movements 62% of the time, compared with a historical average of around 50%.

Researchers say the approach could be useful for investors, businesses and policymakers seeking to anticipate changes in energy costs.

Dr Vasilakis said the necessary data was already publicly available through sources including the Federal Reserve Economic Data database and commercial financial platforms.

“For anyone following energy markets, such as investors, business owners or even households worried about fuel costs, this means more reliable clues about where prices are heading,” he said.

The researchers argue that the findings challenge the view that oil prices are driven solely by supply and demand.

Instead, they suggest that global financial conditions can quickly feed through into commodity markets, meaning that economic shocks in one part of the world can influence energy prices elsewhere.

Economic forecasting

Dr Vasilakis said understanding these connections could help governments and organisations improve economic forecasting and prepare for future crises.

“Monitoring global market integration can therefore support better macroeconomic forecasting, energy policy design and crisis preparedness,” he said.

The study concludes that a single global risk indicator, built using publicly available information, could provide a practical tool for improving decision-making in increasingly interconnected financial and energy markets.