Are Financial Investors Destabilising the Oil Market?

Leo Drollas. Centre for Global Energy Studies

Consideration is given to what has caused the extreme volatility in oil price in the last two years and whether this relates to fundamentals or the oil futures market. It is suggested that what determines oil prices in the short run is linked in part to inventory disequilibrium’s, with desired inventories being a function of oil demand, stocks and the shape of the forward curve. The forward curve is exclusively a product of the futures market. Whilst oil fundamentals affect price, the instability of the industry impacts on expectations in terms of future supplies, demand, and costs, resulting in price volatility and a concomitant need for hedging. Future prices offer speculators an opportunity to profit from the oil market’s instability, but speculators are not responsible for the oil market’s instability, rather they can exaggerate oil price movements.