In this course, the Interagency Task Force on Commodity Markets examined both fundamental factors and trading activity in the crude oil futures market during the period January 2003 through June 2008. Fundamentals have changed in important ways during the past few years. Demand for oil has shifted upward, reflecting strong economic growth in commodity-intensive, emerging market economies, notably China, India and the Middle East. Some nations provide subsidies that hold down fuel prices, thereby further boosting oil consumption. At the same time, supply has not kept pace. World oil production has increased only slightly over the past few years. Consequently, oil prices have risen to keep world oil consumption in line with production (the two must be equal aside from changes in inventories). As oil demand is very insensitive to moves in oil prices in the near term, the rise in oil prices has been disproportionately large in order to offset the robust, income-driven rise in demand. In addition, the decline in the foreign exchange value of the dollar also has contributed somewhat to the increase in the dollar price of oil.
These new demand and supply realities have contributed to an increased interest to participate in futures markets. Commercial entities seeking to avoid exposure to changes in the prices of crude oil they will purchase or sell are motivated to establish hedges. In addition, some participants perceive holding long crude oil futures positions as offering protection from further declines in the dollar. Still others utilize futures positions to ameliorate risk from their other portfolio holdings.
A robust increase in trading activity in the crude oil futures market had largely occurred during the same time that the price of crude oil was rising. This prompted a need to examine if the behavior of some market participants had a possible impact on the price of crude oil.
To date, there is no statistically significant evidence that the position changes of any category or subcategory of traders systematically affect prices. This is to be expected in well-functioning markets. On the contrary, there is evidence that non-commercial entities alter their position following price changes. This is also expected because new prices convey information affecting the prospects and the risks of those entities.
The view that financial investors have pushed prices above fundamental values is also difficult to square with the fact that prices for other commodities that do not trade on established futures markets (such as coal, steel, and onions) have risen sharply as well. The Task Force will continue its examination of the dynamics of the crude oil futures market and other commodity markets and will report further on its work later this year.
ITFReview the quiz before studying the course.
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