Big Fish: Oil Markets and Speculation

Alessandro Cologni, Elisa Scarpa and Francesco Giuseppe Sitzia
Additional contact information
Alessandro Cologni: Edison Trading S.p.A.
Elisa Scarpa: Edison Trading S.p.A., University of Milan, Polytechnic University of Milan
Francesco Giuseppe Sitzia: Edison Trading S.p.A.

No 2015.52, Working Papers from Fondazione Eni Enrico Mattei

Abstract: The role of speculators in the oil markets has been vastly investigated during the last few years. Several authors focused on the definition of speculation while others examined the relationship between oil prices and the behavior of trading actors. In this paper, we formulate a new theory able to describe “hedging needs” as well as the role of speculators in the crude oil market. According to our model, the different strategies of producers and consumers aimed at defending themselves against abrupt oil price changes can be satisfied only if speculators play a very active role. Due to the rapid growth in shale oil production, the importance of speculation in ensuring an equilibrium in the U.S. crude oil market has consequently grown noticeably. We estimate an econometric conditional Error Correction Model (ECM) applying Pesaran’s bound tests, over the sample February 2000 November 2014, using WTI and CFTC data. Our theory is well supported by econometric evidence. In other words, our model is suitable to demonstrate how commercial operators act on the market. In addition, the increasing importance of future contracts (also known as financialisation of crude oil market) helps in reaching a level of prices close to the equilibrium one. Finally, we are able to find evidence of a positive impact of the action of speculators on the efficiency of oil markets as they help stabilizing prices.

Keywords: Oil Price Dynamics; Speculation and Fundamentals; Conditional Error; Correction Models; Pesaran Bounds Testing Approach (search for similar items in EconPapers)
JEL-codes: D84 G15 Q4 Q41 (search for similar items in EconPapers)
Date: 2015-06
New Economics Papers: this item is included in nep-ene
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2015.52

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