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The Role of Speculation in Oil Markets: What Have We Learned So Far?

The Role of Speculation in Oil Markets: What Have We Learned So Far?

Full Title: The Role of Speculation in Oil Markets: What Have We Learned So Far?
Author(s): Bassam Fattouh, Lutz Kilian and Lavan Mahadeva
Publisher(s): n/a
Publication Date: July 1, 2012
Full Text: Download Resource
Description (excerpt):

A popular view is that the surge in the real price of oil during 2003-08 cannot be explained by economic fundamentals, but was caused by the increased financialization of oil futures markets, which in  turn allowed speculation to become a major determinant of the spot price of oil. This interpretation has  been driving policy efforts to tighten the regulation of oil derivatives markets. This survey reviews the  evidence supporting this view. We identify six strands in the literature and discuss to what extent each  sheds light on the role of speculation. We find that the existing evidence is not supportive of an important  role of speculation in driving the spot price of oil after 2003. Instead, there is strong evidence that the co-  movement between spot and futures prices reflects common economic fundamentals rather than the  financialization of oil futures markets.

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