Examining the Role of Financial Investors and Speculation in Oil Markets

Abstract

Repeated oil-price spikes have generated a great deal of controversy about the role played by speculation in derivatives markets. A number of analysts have suggested that the speculative positions of financial investors played a major part in the 2008 oil-price hike. In contrast, some economists claim that oil inventories did not increase sufficiently for speculation to be the cause of the run up in oil prices. This article presents these two apparently contradictory arguments and attempts to reconcile them by emphasizing the inertia of the world oil–demand response to price variations. The authors present a number of factors that help reconcile these beliefs, including incomplete oil inventory statistics, increased ground storage, the use of inventories for current production, and the impact of a “focal price” that is inconsistent with the immediate market fundamentals.