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For immediate release: October 13, 2011

Dallas Fed: Fundamentals Drove Speculative Activity, Oil Prices in 2008 Run-Up

DALLAS—Fundamentals drove speculative activity when oil prices hit a record high in 2008, rather than speculation dictating prices, according to two new issues of the Federal Reserve Bank of Dallas’ Economic Letter.

In “Did Speculation Drive Oil Prices? Futures Market Points to Fundamentals,” research economist Michael D. Plante and senior economist and vice president Mine K. Yücel examine data related to the futures markets for evidence that would signal speculation primarily drove prices.

“Looking at the 2007–09 period, the data are consistent with how a well-functioning futures market would behave, initially when there is tightness in the market, and later when there is considerable slack due to the global recession,” the authors write.

Futures market traders seemed to have been routine market participants, the authors find.

In a companion Economic Letter, “Did Speculation Drive Oil Prices? Market Fundamentals Suggest Otherwise,” the authors analyze the cash, or “physical,” oil market, with similar findings.

Prices in the physical market were consistent with several market fundamentals, including increased demand from emerging markets, low elasticities of demand and reduced OPEC excess capacity, Plante and Yücel write.

“The behavior of inventories was also consistent with the reality of a tight market, not with a story of speculation-driven hoarding, whether we look at inventories above ground, below ground or floating at sea,” the authors state.

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