The Oil Markets: Let the Data Speak for Itself
67 Pages Posted: 22 May 2015
Date Written: October 1, 2008
In U.S. dollar terms, crude oil prices increased 525% from the end-of-2001 through July 31st, 2008. Was this rally yet another speculative bubble? Specifically, has the oil rally been based on speculative excess rather than fundamental supply-and-demand factors? In summary, this paper argues that with the fundamental supply-and-demand balance so tight and that with effective OPEC spare capacity so low that it has been logical to see very high prices to ration demand and/or encourage additional supply. That is the job and message of price, even if this is an unpopular message.
The paper discusses how many facets of the world oil market are too opaque, including future productive capacity estimates from important suppliers, inventory statistics from important non-OECD consumers, and summary position data from over-the-counter derivatives participants. There just has to be more transparency in these markets to enable policymakers and their economists to make sound decisions. This paper discusses how useful the petroleum-complex futures markets are in adding to the transparency of the oil markets. Even when fundamental data on the oil markets are sparse or opaque, large-scale supply-and-demand shifts leave footprints in futures-price relationships, from which one can potentially infer the market’s fundamentals. The paper provides several case-studies on this type of analysis. In the presence of active futures markets, an observer need not be a member of a cartel or a large corporation to gain insights into the oil market.
Keywords: commodity markets, oil market, futures market, speculation, oil price
JEL Classification: G1, G18, Q4, Q41
Suggested Citation: Suggested Citation