Jussi Keppo

The Effects of Oil Speculation

Glenn Hyatt,
Thanks for the comments. The forward curve used to be significantly downward sloping but not any more and now the long maturity forwards are much more liquid (this is good for the market participants). So, we could also start the example with a downward sloping forward curve if the initial forward curve reflects the producer’s expectation on the future spot price. Then the changes in the forward curve (less downward sloping) drive the same results.

Note also that in case (iii), inventory rises and this increases the spot price. The problem in analyzing this effect is that global inventory data is “noisy”.


Safariman,
Thanks for the comments. The speculation (how I defined that) can affect the oil supply (producers delay some production) and oil inventories that take oil away from the spot market. As you indicated, at some point in the future the oil should come back to the market but this can be far in the future. If the oil demand increases rapidly in the future the effect from the speculation is positive (and then there is no bubble).