Price Formation in Oil Markets: Some Lessons from 2009

March 25, 2010 | 00:00

Price formation in oil markets: Some lessons from 2009

This comment analyses the oil price dynamics in 2009 arguing that 2009 represents a remarkable year in at least two respects: it witnessed the sharpest increase in spot oil prices in decades; and in the second half of 2009 it exhibited a high degree of relative stability despite a very uncertain and volatile global economic environment.

The 2009 price dynamics indicate that the existing frameworks for the analysis of oil prices need to be modified to take into account new features of the market and the interaction among the various players. Furthermore attempts to identify the relative importance of fundamentals versus speculation in explaining the last price cycle are of limited use. Instead one should attempt to endogenise the role of financial players and understand the conditions under which these players behave in certain ways.

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