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

Bassam Fattouh, Lutz Kilian, and Lavan Mahadeva

Year: 2013
Volume: Volume 34
Number: Number 3
DOI: 10.5547/01956574.34.3.2
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Abstract:
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.



The Role of Financial Speculation in Driving the Price of Crude Oil

Ron Alquist and Olivier Gervais

Year: 2013
Volume: Volume 34
Number: Number 3
DOI: 10.5547/01956574.34.3.3
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Abstract:
As financial firms have increased their positions in the oil futures market during the past ten years, oil prices have increased dramatically as well. The coincidence of these two events has led some observers to argue that financial speculation caused the oil-price increases. Yet several arguments cast doubt on the validity of this claim. For example, although the quantity of oil implied by the number of open futures contracts is much larger than U.S. daily oil consumption, comparing these two statistics is misleading because not all paper oil is immediately deliverable. In addition, changes in financial firms� positions do not predict oil-price changes, but oil-price changes predict changes in positions. Other explanations for the oil-price increases include macroeconomic fundamentals such as increased demand from emerging Asia. Of these explanations, the most consistent with the facts relates the oil-price increases to a series of positive demand shocks emanating from emerging Asia.





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