Investor sentiment and oil prices

Although both theoretical models and anecdotal accounts suggest that investor sentiment in financial markets may be a potential determinant of oil prices, there has been no empirical research that directly addresses this question. We fill this gap. Our findings suggest that investor sentiment helps to explain the fluctuations in oil prices (as well as gasoline, heating oil and oil-company stock prices). High/low sentiment predicts subsequent low/high oil returns particularly at longer horizons. Our findings have important theoretical as well as practical implications. In terms of theoretical implications, our findings suggest that future theoretical models of oil prices should take into account both fundamentals and investor sentiment. In terms of practical implications, our findings imply a new predictor of oil prices.