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Physical Market Determinants of the Price of Crude Oil and the Market Premium

We analyze the physical, i.e. non financial, determinants of the real price of crude oil by means of an equilibrium correction model over the last two decades. We find that two cointegrating relations affect the change in prices: one refers to OPEC's cartel behavior attempting to control prices using its market power and quotas; the other to the coverage rate of expected future demand by OECD using inventory behaviours. We derive an equation for the change in oil prices which we use to assess the speculative elements of the early millennium price hike. We show that worries alien to the physical markets are the causes of the increase in oil prices and are able to quantify their impact.

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Paper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number DR 07020.

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Length: 24 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:ebg:essewp:dr-07020
Contact details of provider: Postal: ESSEC Research Center, BP 105, 95021 Cergy, France
Web page: http://www.essec.edu/
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