Speculative behaviour and oil price predictability

•We relate speculative behaviour in oil markets to regime-switching models.•We develop 2- and 3-state regime-switching models and test their forecasting ability for oil prices.•Our three-state model outperforms the two-state one and the Random Walk benchmark.•In general, the predictors considered in our study improve oil price forecasts.

We develop two- and three-state regime switching models and test their forecasting ability for oil prices. We use the deviations of market oil price from fundamental values as the main explanatory variable in our models, while additional potential predictors enrich our specification. Our findings suggest that the regime-switching models are, in general, more accurate than the Random Walk model in terms of both statistical and economic evaluation criteria for oil price forecasts.