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The Role of Speculation in Oil Markets: What Have We Learned So Far?

A popular view is that the surge in the real price of oil during 2003-08 cannot be explained by economic fundamentals, but was caused by the increased financialization of oil futures markets, which in turn allowed speculation to become a major determinant of the spot price of oil. This interpretation has been driving policy efforts to tighten the regulation of oil derivatives markets. This survey reviews the evidence supporting this view. We identify six strands in the literature and discuss to what extent each sheds light on the role of speculation. We find that the existing evidence is not supportive of an important role of speculation in driving the spot price of oil after 2003. Instead, there is strong evidence that the co-movement between spot and futures prices reflects common economic fundamentals rather than the financialization of oil futures markets.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Petroleum – Policy and Regulation; Energy Investment and Finance – Trading Strategies and Financial Instruments; Energy Investment and Finance – Corporate Strategy; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
G13 - Contingent Pricing; Futures Pricing; option pricing
D92 - Intertemporal Firm Choice: Investment, Capacity, and Financing
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination

Keywords: Oil price, Spot market, Futures market, Fundamentals, Speculation, Financialization

DOI: 10.5547/01956574.34.3.2

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Published in Volume 34, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.