Oil prices: oversupply, speculation, inefficiency

The price of oil is usually refers to the spot price of a barrel of benchmark crude oil. In North America, the most common oil price indicator is the West Texas Intermediate (WTI) Cushing Crude Oil Spot Price, representing the price of the Texas Light Sweet crude oil which is traditionally used as a benchmark for New York Mercantile Exchange (NYMEX) oil futures contracts. The leading global price benchmark for Atlantic basin crude oil is the Brent Crude traded on the Intercontinental Exchange (ICE), with the associated Brent Index calculated as the cash settlement price for the ICE Brent Future. Some other popular benchmarks are the OPEC Reference Basket, the Dubai Crude, the Oman Crude, and the Urals oil.

Long-term oil price dynamics is shaped by the worldwide demand for oil which is highly dependent on global macroeconomic conditions, major geopolitical events, and industrial trends. Over shorter time intervals, oil price is strongly affected by market speculation involving risky financial transactions in an attempt to profit from fluctuations in the market value of the traded financial instruments.  The role of the speculation is controversial. On one hand, speculation is instrumental in as a means to reach a balanced spot price of oil consistent with its fundamental value. On the other hand, speculation can lead to detrimental effects such as economic bubbles and excessive volatility.

By 12 December 2014, both Brent and WTI crude oil prices, and the majority of the other benchmarks, reached their lowest values since 2009. While the 2014-2015 global oversupply is often considered as the leading macroeconomic cause of the overall oil price decay, the volatile dynamics observed at shorter time scales is likely a footprint of massive speculative transactions. The combined result of the two effects, the long-term supply trend and the excessive speculation, is not well understood. Can the speculative transactions destabilize the global oil market, and if so, do we need more restrictive government policies limiting the speculation? Does this market meet the requirements of the informational efficiency assumed by many existing asset theories?  Is a mathematical forecast of the ongoing oil price change theoretically possible?  These are some of the questions studying in this project.

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