Oil Markets and Price Movements: A Survey of Determinants

76 Pages Posted: 6 Jun 2013

See all articles by Hillard Huntington

Hillard Huntington

Stanford University - Energy Modeling Forum

Zhuo Huang

National School of Development, Peking University

Saud Al-Fattah

Saudi Aramco; King Fahd University of Petroleum and Minerals (KFUPM)

Michael Gucwa

Stanford University - Huang Engineering Center

Ali Nouri

Stanford University - Huang Engineering Center

Date Written: July 5, 2012

Abstract

The complexity of the world oil market has increased dramatically in recent years and new approaches are needed to understand, model, and forecast oil prices today. In addition to the commencement of the financialization era in oil markets, there have been structural changes in the global oil market. Financial instruments are communicating information about future conditions much more rapidly than in the past. Prices from long and short duration contracts have started moving more together. Sudden supply and demand adjustments, such as the financial crisis of 2008-2009, faster Chinese economic growth, the Libyan uprising, the Iranian nuclear standstill or the deepwater horizon oil spill, change expectations and current prices.

The daily Brent spot price fluctuated between $30 and above $140 per barrel since the beginning of 2004. Both fundamental and financial explanations have been offered as explanatory factors. This paper selectively reviews the voluminous literature on oil price determinants since the early 1970s. It concludes that most researchers attribute the long-run oil price path to fundamental factors such as economic growth, resource depletion, technical advancements in both oil supply and demand, and the market organization of major oil petroleum exporting countries (OPEC). Short-run price movements are more difficult to explain. Many researchers attribute short-run price movements to fundamental supply and demand factors in a market with very little quantity response to price changes. Nevertheless, there appears to be some evidence of occasional financial bubbles particularly in months leading up to the financial collapse in 2008. These conflicting stories will not be properly integrated without a meeting of the minds between financial and energy economists.

Keywords: oil prices, supply and demand analysis, financial markets

JEL Classification: D4, E3

Suggested Citation

Huntington, Hillard and Huang, Zhuo and Al-Fattah, Saud and Gucwa, Michael and Nouri, Ali, Oil Markets and Price Movements: A Survey of Determinants (July 5, 2012). Available at SSRN: https://ssrn.com/abstract=2274543 or http://dx.doi.org/10.2139/ssrn.2274543

Hillard Huntington

Stanford University - Energy Modeling Forum ( email )

475 Via Ortega
Stanford, CA 94305-4121
United States

Zhuo Huang

National School of Development, Peking University ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

Saud Al-Fattah (Contact Author)

Saudi Aramco ( email )

Dhahran, 31311
Saudi Arabia
00966504984090 (Phone)

HOME PAGE: http://www.saudalfattah.com

King Fahd University of Petroleum and Minerals (KFUPM) ( email )

Dhahran, 31311
Saudi Arabia
00966504984090 (Phone)

HOME PAGE: http://www.saudalfattah.com

Michael Gucwa

Stanford University - Huang Engineering Center ( email )

475 Via Ortega
Stanford, CA 94305-4121
United States

Ali Nouri

Stanford University - Huang Engineering Center ( email )

475 Via Ortega
Stanford, CA 94305-4121
United States

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