Does speculation drive the price of oil?

Hannesson, Rögnvaldur

doi:10.1111/j.1753-0237.2011.00207.x

“…A burgeoning empirical literature links changes in commodity price behavior to shifts in financial participation. Among the striking effects attributed to this trend rise in participation are: a greater volatility of the spot price (Tang & Xiong, ; Hamilton & Wu, ); an increased price co‐movement between crude oil and financial assets and between crude oil and other non‐energy commodities (Silvennoinen & Thorp, ; Büyükşahin & Robe, ); the fact that financial players’ investment strategies, preferences, degree of risk aversion, and financial constraints can impact futures prices (Acharya, Lochstoer, & Ramadorai, ; Etula, ; Singleton, ); a breakdown of the relationship between oil prices and inventories (Masters, ); and increasing mutual causality between the current spot price, the spot price in the future, and the price for delivery in the future (Hannesson, ).…”

Section: Introductionmentioning

confidence: 99%

Causes and Implications of Shifts in Financial Participation in Commodity Markets

Fattouh

¹

,

Mahadeva

²

2014

Journal of Futures Markets

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We assess the causes and implications of the greater financial participation in commodity markets post‐2003. Focusing on crude oil, we build a calibrated macro‐finance model of oil prices and quantities that also determines consumer welfare. We show that shifts in the preferences and constraints of financial speculators cannot explain the observed movement in the futures spread and so are unlikely to expose consumer welfare to shocks, even in the presence of belief disagreements. Shifts in the supply and demand for spot oil can better explain many of the features often attributed to financialization including financial participation itself. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 34:757–787, 2014

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“…A burgeoning empirical literature links greater financialization to deep changes in oil market behaviour. Among the striking effects attributed to financialization are: a greater volatility of the spot price (Tang and Xiong (2010); Hamilton and Wu (2012)); an increased price comovement between crude oil and financial assets and between crude oil and other non-energy commodities (Silvennoinen and Thorp (2010); Büyükşahin and Robe (2011); the fact that financial players' investment strategies, preferences, degree of risk aversion, and financial constraints can impact futures prices (Acharya, Lochstoer, and Ramadorai (2011); Etula (2009); Singleton (2011)); a breakdown of the relationship between oil prices and inventories (Masters (2008)); and increasing mutual causality between the current spot price, the spot price in the future, and the price for delivery in the future (Hannesson (2012)). These empirical findings have triggered concerns among policymakers that the functioning of the oil market has been distorted by greater financialization with adverse consequences on final consumers' welfare.…”

Section: Introductionmentioning

confidence: 99%

Assessing the Financialization Hypothesis

Fattouh

¹

,

Mahadeva

²

2012

SSRN Journal

2

0

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The main objectives of this paper are to assess whether financialization can impact oil market behaviour over and above structural fundamental changes, and whether these changes affect final consumers' welfare. We build a calibrated macro-finance model of the oil market that solves for the term structure of spot prices and the futures price, as well as consumer welfare. While shifts arising in financial investors' preferences and wealth can explain the rise in participation of purely financial investors, they fail to explain key features such as the movements in the basis. Instead, anticipated changes in the physical layer of the oil market can better explain many of the features often attributed to financialization. We also find that greater financialization has no harmful effects on consumer welfare. Our paper shows that from a regulatory point of view, it is crucial in the first instance to identify the channels through which financialization can result in market failure and then design policies accordingly. JEL-Classification: C63, G12, G13, G17, Q43

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“…Among the striking effects attributed to financialization are: a greater volatility of the spot price (Tang and Xiong (2010); Hamilton and Wu (2012)); an increased price comovement between crude oil and financial assets and between crude oil and other non-energy commodities (Silvennoinen and Thorp (2010); Büyükşahin and Robe (2011); the fact that financial players' investment strategies, preferences, degree of risk aversion, and financial constraints can impact futures prices (Acharya, Lochstoer, and Ramadorai (2011);Etula (2009) ;Singleton (2011)); a breakdown of the relationship between oil prices and inventories (Masters (2008)); and increasing mutual causality between the current spot price, the spot price in the future, and the price for delivery in the future (Hannesson (2012)). These empirical findings have triggered concerns among policymakers that the functioning of the oil market has been distorted by greater financialization with adverse consequences on final consumers' welfare.…”

Section: Introductionmentioning

confidence: 99%

Assessing the Financialization Hypothesis

Fattouh

¹

,

Mahadeva

²

2012

View full text Add to dashboard Cite

The main objectives of this paper are to assess whether financialization can impact oil market behaviour over and above structural fundamental changes, and whether these changes affect final consumers' welfare. We build a calibrated macro-finance model of the oil market that solves for the term structure of spot prices and the futures price, as well as consumer welfare. While shifts arising in financial investors' preferences and wealth can explain the rise in participation of purely financial investors, they fail to explain key features such as the movements in the basis. Instead, anticipated changes in the physical layer of the oil market can better explain many of the features often attributed to financialization. We also find that greater financialization has no harmful effects on consumer welfare. Our paper shows that from a regulatory point of view, it is crucial in the first instance to identify the channels through which financialization can result in market failure and then design policies accordingly.JEL-Classification: C63, G12, G13, G17, Q43

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Does speculation drive the price of oil?

Cited by 5 publications

References 8 publications

Causes and Implications of Shifts in Financial Participation in Commodity Markets

Causes and Implications of Shifts in Financial Participation in Commodity Markets

Assessing the Financialization Hypothesis

Assessing the Financialization Hypothesis

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