The increase in world oil prices to almost $80 per barrel in 2006 – occurring at the same time immense flows of capital flowed into commodities and hundreds of new financial institutions (many of them Hedge Funds) got involved in energy trade – naturally led to concerns that these events were linked. Could oil prices have increased by as much if there were no financial oil markets?
Energy Security Analysis, Inc. (ESAI) has been involved in the systematic analysis of financial energy markets for more than a decade. Instead of taking a doctrinaire approach for or against the role of financial players – especially speculators – ESAI has always striven to identify the linkages between financial and physical energy markets with a practical, common-sense approach.
This White Paper is the result of such a practical assessment. We find that there are reasons to believe the financial markets have a distinct impact on energy prices, both on the level of prices and their volatility. But we also find that efficient energy markets – especially those that develop liquid forward market – have immense and global economic value. Rather than regulate financial market out of existence, the challenge to market participants is to develop a mature and practical understanding of the nexus between financial and physical energy markets. Limited availability at a reduced rate of $550. |
