Work detail

Speculative versus Fair Price of Crude Oil

Author: Bc. Pavel Šlechta
Year: 2012 - summer
Leaders: doc. PhDr. Petr Teplý Ph.D.
Consultants:
Work type: Bachelors
Language: English
Pages: 65
Awards and prizes: B.A. with distinction from the Dean of the Faculty of Social Sciences for an extraordinarily good bachelors diploma thesis.
Link:
Abstract: The thesis deals with the topic of speculation on the crude oil market. This topic
has been frequently discussed in association with the price hikes in 2008, but since the oil
price has recently repeatedly reached levels over USD 100, the topic is still very present. In
our thesis we analyze the connection between the increasing open interest on the New York
Mercantile Exchange crude oil futures market, the supply and demand factors for the crude
oil and the crude oil price. Based on an error correction model analysis of monthly
observations between 1994 and 2011, we show how an increase in the open interest, which
is currently already comprised by the non-commercial traders by one half, can lead to a
persistent increase in the crude oil prices. We believe it is the risk premium on the market
which stands for the long-run equilibrium of the open interest and prices. Such a risk
premium on the market of crude oil could explain the part of the increase in prices which
could have not been captured by the simple supply and demand, as for example the concern
about the Hubbert’s peak oil. We also test whether the oil price volatility increases the open
interest on the market, which would mean that the price volatility could attract more
speculative traders. Although we find Granger causality, we cannot conclude a simply
positive or negative effect.
Downloadable: Bachelor Theses of Slechta

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