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. We present these two apparently contradictory arguments and attempt to reconcile them by emphasizing the inertia of the world-oil-demand response to price variations. The existence of market's focal points is also analyzed.

Keywords: specualtion, oil, inventories