Selective hedging strategies for oil stockpiling

As a feasible option for improving the economics and operational efficiency of stockpiling by public agency, this study suggests simple selective hedging strategies using forward contracts. The main advantage of these selective hedging strategies over the previous ones is not to predict future spot prices, but to utilize the sign and magnitude of basis easily available to the public. Using the weekly spot and forward prices of West Texas Intermediate for the period of October 1997–August 2002, this study adopts an ex ante out-of-sample analysis to examine selective hedging performances compared to no-hedge and minimum-variance routine hedging strategies. To some extent, selective hedging strategies dominate the traditional routine hedging strategy, but do not improve upon the expected returns of no-hedge case, which is mainly due to the data characteristics of out-of-sample period used in this analysis.