Wednesday, March 2, 2011

Energy and Financial Markets Overview:Crude Oil Price Formation -- EIA

This report from the U.S. Energy Information Administration, dated February 23, 2011, reviews economic literature regarding supply-demand fundamentals and the role of financial market speculation and investment in the oil-price formation process – the work is ongoing, but still at an early stage

• Some researchers are finding evidence that factors including unexpectedly strong economic growth in China and stagnant supply were at least associated with, and may have contributed to, the sharp oil price run-up and subsequent decline during the 2007-2008 period

• The researchers are also finding some evidence suggesting that the price run-up and decline may have been exacerbated by the formation and collapse of an oil price bubble, perhaps triggered by fundamental factors in both the oil market and the broader global economy

• As discussed later in the presentation, both internal EIA and academic research is also addressing the major increase in oil derivatives trading, significant change in the composition of derivatives traders (such as the growth of swap dealers, hedge funds, and commodity index funds), and increased correlation of oil and other markets over the past several years.

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