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How does media sentiment impact crude oil prices?

Kaiyang Chen
Kaiyang Chen
Quant Solutions Consultant for North Asia, Refinitiv

How does the Refinitiv MarketPsych index analyze media sentiment and enable investors to more accurately predict the path of crude oil prices?

  1. Advances in natural language processing technology means investors are now able to more effectively analyze the influence of media sentiment on the crude oil price.
  2. The Refinitiv MarketPsych index (RMI) can be used to analyze media sentiment data and improve trade strategy by helping investors to study the emotions that influence the crude oil price.
  3. Traders can also use the RMI to help analyze data from other market signals such as ‘fear’, for example a sudden flight to quality by investors, and ‘violence’, such as the military events in the Middle East.

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Crude oil is a global commodity that trades in markets around the world, both as spot oil and via derivatives contracts.

Investors study factors that could explain the fluctuation of crude oil prices. They mainly focus on supply-side, such as production capacity; demand-side, such as GDP growth and PMI; dollar and U.S. debt-related assets; and safety haven assets. 

MarketPsych Indices: Easy-to-interpret real-time analytics across news and social media

The development of natural language processing technology has enabled the collection information from news and social media platforms more effectively.

The Refinitiv MarketPsych index and crude oil price analysis

The Refinitiv MarketPsych index (RMI) covers a variety of asset classes, and could improve trade strategy from three approaches:

  1. The RMI provides delicate segmentation among different asset classes. For example, VIX is also known as a volatility index, but it is not designed for crude oil or other specific commodities. If investors want to study the emotion associated with crude oil, the MarketPsych index contains more insightful information.
  2. It can also explain an existing economic assumption from a different perspective, and therefore provide incremental information. For example, when measuring the demand for crude oil, existing studies might use EIA crude oil inventories or the RBOB-WTI spread as an indicator. The MarketPsych index is able to quantify the emotion associated with the consumption of petroleum products, which is straightforward and observable.
  3. The RMI is able to fill in the blanks for event-driven type data demand. Normally, the event-driven type data is low-frequency and high-latency, which limits its application in data-mining. However, people’s emotion with regard to such events is high-frequency and low-latency. The MarketPsych index could transform the unavailable dataset into a ready-to-use quant strategy resource.

A further benefit of the MarketPsych index is that it can help an investor to gain an advantage from analysis of other market signals such as ‘fear’ and ‘violence’.

The fear index

In his book Trading on Sentiment: The Power of Minds Over Markets, Richard Peterson wrote about ‘fear’ and uncertainty’ in investing. He said that price movements in currencies often occur as a result of sudden ‘flight to quality’ (a euphemism for panic) among traders who engage in the same safety-seeking behavior simultaneously.

Such patterns in currency prices, based on changes in consensus price expectations and uncertainty, may be modeled using new and novel sources of currency information flow.

In plain English, a panic level about a future outcome may urge those investors who are seeking safety to enter or exit the market simultaneously, and in doing so create a risk premium.

The chart below is the simulated result of using the fear index of MarketPsych as a short-term trending following signal.

The fear index of crude oil

The violence index

‘Violence’ is an event type of factor. Usually, event-driven factors are difficult to apply to the real world because most of them are low-frequency and high-latency data.

For example, macro-economic indicators are published quarterly and at a delay of 10-20 days, which means that this type of data causes problems for quant trading.

In the crude oil market, factors that have a significant impact on price are not limited to production capacity or output, and are often more complicated.

Since the political, economic, and military situation in the Middle East has a clear influence on the market, the relationship between OPEC and the U.S. and Russia, and the relationship among OPEC countries should also be considered.

Fortunately, a number of those relationships could be captured by our RMI data because ‘violence’ can be used to measure the emotion of military events.

We believe that the RMI could be used to generate data related to event-driven factors and help fill in the blanks.

The chart below is the simulated result of using the ‘violence’ index of MarketPsych as a mid-term trending following signal.

The violence index of crude oil

MarketPsych Indices: Easy-to-interpret real-time analytics across news and social media