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The role of market fundamentals and speculation in recent price changes for crude oil

  • Kaufmann, Robert K.

I hypothesize that the price spike and collapse of 2007-2008 are driven by both changes in both market fundamentals and speculative pressures. Contrary to arguments for a demand shock, I hypothesize that prices rise sharply in 2007-2008 because ongoing growth in Chinese oil demand runs into a sudden and unexpected halt to a decade long increase in non-OPEC production. This caused a loss of OPEC spare capacity because increased demand for OPEC production runs ahead of increases in OPEC capacity. These changes are reinforced by speculative expectations. Although difficult to measure directly, I argue for the role of speculation based on the following: (1) a significant increase in private US crude oil inventories since 2004; (2) repeated and extended break-downs (starting in 2004) in the cointegrating relationship between spot and far month future prices that are inconsistent with the law of one price and arbitrage opportunities; and (3) statistical and predictive failures by an econometric model of oil prices that is based on market fundamentals. These changes are related to the behavior and impact of noise traders on asset prices to sketch mechanisms by which speculative expectations can affect crude oil prices.

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Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 39 (2011)
Issue (Month): 1 (January)
Pages: 105-115

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Handle: RePEc:eee:enepol:v:39:y:2011:i:1:p:105-115
Contact details of provider: Web page: http://www.elsevier.com/locate/enpol

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  8. DEES St├ęphane & KARADELOGLOU Pavlos & KAUFMANN Robert & SANCHEZ Marcelo, . "Modelling the World Oil Market: Assessment of a Quarterly Econometric Model," EcoMod2003 330700040, EcoMod.
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  16. S. Gurcan Gulen, 1999. "Regionalization in the World Crude Oil Market: Further Evidence," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 125-139.
  17. Kaufmann, Robert K. & Dees, Stephane & Gasteuil, Audrey & Mann, Michael, 2008. "Oil prices: The role of refinery utilization, futures markets and non-linearities," Energy Economics, Elsevier, vol. 30(5), pages 2609-2622, September.
  18. Weiner, Robert J., 2002. "Sheep in wolves' clothing? Speculators and price volatility in petroleum futures," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(2), pages 391-400.
  19. Bradley Ewing & Cynthia Lay Harter, 2000. "Co-movements of Alaska North Slope and UK Brent crude oil prices," Applied Economics Letters, Taylor & Francis Journals, vol. 7(8), pages 553-558.
  20. M.A. Adelman, 1992. "Is the World Oil Market 'One Great Pool'? -- Comment," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
  21. M. A. Adelman, 1984. "International Oil Agreements," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-10.
  22. Andrews, Donald W.K. & Kim, Jae-Young, 2006. "Tests for Cointegration Breakdown Over a Short Time Period," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 379-394, October.
  23. Robert K. Kaufmann & Cutler J. Cleveland, 2001. "Oil Production in the Lower 48 States: Economic, Geological, and Institutional Determinants," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 27-49.
  24. Fattouh, Bassam, 2010. "The dynamics of crude oil price differentials," Energy Economics, Elsevier, vol. 32(2), pages 334-342, March.
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