Speculation On International Oil Prices

During 2001, international oil price was generally under $30/barrel. The price then rose above $30, and peaked at $147.27 in July 2008. Afterwards, the price began to drop and fell to $33.20 in January 2009. It is unprecedented that the crude oil price, which is the most important bulk commodity, fluctuates so dramatically. Is it caused simply by changes in fundamentals? Are speculations responsible for fluctuations of crude oil prices? There is a widespread international debate about these questions. However, no final conclusion has yet been drawn on this matter. The difficulty lies in the fact that it is hard to get the exact numerical equilibrium price of crude oil solely by supply and demand. In addition, the traditional theory encounters difficulties in explaining the new futures market speculation.Through a detailed discussion, in this article, we reject four main arguments of"pure fundamentals theory"and prove that speculation indeed make crude oil futures price deviate from the fundamentals to some extent. More importantly, we systematically compare the differences between the current reality of crude oil futures market and traditional futures theory. The comparison includes special pricing mechanism of crude oil market and the decline in influence of the spot market participants'on futures market due to large-scale speculative funds. We also discuss how commodity index fund changes the way the futures prices are formed and three regulatory loopholes that make the manipulation in the futures market possible. Through the analysis of these characteristics in crude oil futures markets, we explain why the price of the crude oil futures can deviate from the fundamentals in long-term.China's interdependence on imported oil has exceeded 50% of its total demand, thus it is essential to have a comprehensive understanding of the formative mechanism of the crude oil prices. This article is an attempt in which the author tries to clarify some misunderstandings of the formative mechanism of the international oil prices and provides a reference for further policy research. At the same time, by analyzing some new changes in the crude oil futures market, the author also intend to help the academia understand the differences between the current reality of crude oil futures market and traditional futures theory, which is useful in further theoretical research.