The Role of Speculation in Oil Markets: What Have We Learned So Far?

TLDR

The 2003‑2008 surge in real oil prices has been attributed by some to increased financialization of futures markets, suggesting speculation drove spot prices. This survey examines evidence for that claim. The authors review six strands of literature to assess speculation’s influence. They conclude evidence does not support a major speculative role; instead spot‑futures co‑movement reflects shared fundamentals.

Abstract

A popular view is that the surge in the real price of oil during 2003-08 cannot be explained by economic fundamentals, but was caused by the increased financialization of oil futures markets, which in turn allowed speculation to become a major determinant of the spot price of oil. This interpretation has been driving policy efforts to tighten the regulation of oil derivatives markets. This survey reviews the evidence supporting this view. We identify six strands in the literature and discuss to what extent each sheds light on the role of speculation. We find that the existing evidence is not supportive of an important role of speculation in driving the spot price of oil after 2003. Instead, there is strong evidence that the co-movement between spot and futures prices reflects common economic fundamentals rather than the financialization of oil futures markets.