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Do Financial Investors Destabilize The Oil Price?

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Executive Summary

In this paper, the authors assess whether and to what extent financial activity in the oil futures markets has contributed to destabilize oil prices in recent years. They define a destabilizing financial shock as a shift in oil prices that is not related to current and expected fundamentals, and thereby distorts efficient pricing in the oil market. Using a structural VAR model identified with sign restrictions, they disentangle this non-fundamental financial shock from fundamental shocks to oil supply and demand to determine their relative importance. They find that financial investors in the futures market can destabilize oil spot prices, although only in the short run.

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