石油價格在市場經濟中的重要性
 

石油價格已經成為當今市場經濟中的一個基本因素,它影響著金融市場以及消費者、企業和政府。石油價格波動不僅會對股票市場產生巨大的影響,也對全球經濟產生重大影響:石油具有工業用途如發電、化工產品、運輸等。特別是石油供給和需求的波動性或有任何的價格上升或下降走勢都會被金融市場的參與者所關注，因為它會直接影響出口和進口國家的未來的前景和實際增長。更高的原油價格意味著更高的能源價格，這會導致經濟增長放緩,通脹壓力,消費者和生產者的不對稱以及全球失衡。石油短缺和新興市場國家的需求增長已經改變了石油市場和政治不確定性，這導致了油價波動性的增加。

自2000年以來,原油價格經歷了一個不可思議的價格上漲,從2000年25美元到2008年7月的超過144美元，再降到2008年12月的35美元。

 

The Importance Of Oil Price In Market Economy

 

Oil price has become a fundamental factor of today’s market economy as it influences financial markets as well as consumers, corporations and governments. Oil fluctuation has not only a tremendous impact over the stock markets but also a major influence on the global economy: oil is needed for industrial purpose such as power generation, chemical products, transportation etc. In particular oil demand and supply drive volatility and any upward or downward price movements is tracked by any financial market player as it directly influences future outlook and real growth of exporting and importing countries. Higher crude oil price implies higher price of energy leading to a slower economic growth, inflationary pressure, asymmetrical results on consumers and producers side and global imbalances. Oil scarcity and increasing demand of emerging market countries have changed oil market as well as political uncertainty leads to an increase in oil volatility.

 

Since 2000, crude oil has experienced an incredible price rally, moving from $25 in 2000 to over $144 in July 2008 and getting back later December 2008 to $35. These huge price changes are mainly undesired because they increase uncertainty and undermine investment in oil as well as alternative energy sources. Even if we are getting more and more familiar with this price uncertainty or at least with oil price volatility, it is necessary to understand the key driver of this commodity in order to be able to conduct accurate studies and to forecast and prevent new worldwide market chock: there are mainly two different explanation to oil price behavior. The first one is related to the idea that markets are experiencing a structural transformation in oil price fundamentals; the second one is related to substantial speculation in oil market. The supporters of this second view argue that the massive oil crude price cannot be explained by simple change in market fundamentals but can be rather explained through a market distortion caused by speculators.#p#分頁標題#e#

 

This dissertation will investigate oil and the oil market players trying to understand the different price determinants and the interaction of key players: it starts with an historical overview of oil price and it successively analyzed oil as a commodity, oil as a financial asset, the role of expectations in the formation of oil price, the industry outlook for the next years, oil derivatives on the financial markets.

 

Oil Fundamentals

 

History

 

Oil industry was born in the 1859 in Pennsylvania, United States when Edwin Drake opened the first oil well. The industry grew slowly during the second half of 1800 when the business pioneer George Bissell together with the banker, James Townsend, established the first oil company: Pennsylvania Rock Oil Company. The industry became more and more attractive and in 1870 John D. Rockefeller established the Standard Oil Company. Boosted by the introduction of the internal combustion engine and by an increasing energy demand caused by the outbreak of World War I, the oil industry became one of the foundations of modern industrial society, ready to overcome coal as the most used and requested energy source.

 

As the graph points out the price of oil remained steady from the beginning of the century until the first energy crisis, risen by less than two percent per year. Spot crude oil price moved from $2.83 per barrel of 1973 to $10.41 of 1974. This increase in price was caused by the oil embargo proclaimed by the OPEC, Organization of Arab Petroleum Exporting countries in response to the U.S. decision to re-supply the Israeli military during the 1973 Arab-Israeli War, fought between Israel and a coalition of Arab states backing Egypt and Syria. The OPEC countries limited their production as well as the shipment of oil cargos to United States and other countries. The embargo led to quadrupled and extremely volatile oil price and it showed how high was the dependency of western economies from the oil reserves controlled by the OPEC members. Following the first oil crisis, in 1979 took place another sharp rise of oil prices following the Iranian revolution: the overthrow of the regime of Shah Reza Pahlavi triggered a strong speculative movements of oil price. The price increased from the $14 needed to buy a barrel in 1978 to roughly $30 in 1979 causing a widespread panic and affecting geopolitical forces. Moreover in 1980, Iraqi invaded Iran leading to oil cut production of Iraq and a total stop of Iranian production. All these events strongly influenced oil price and demonstrated how pure supply and demand get overcome from sociopolitical facts.

 

The so-called oil glut of 80s changed again the oil market environment as the price of the black gold fell from $35 to $15 in 1986 due to a falling demand, slowed economic activities in industrial countries and an increase in production. The crude oil price fluctuated between $15 and $25 until 1999. At the beginning of the new century the oil price increased exponentially and reaching $30 in 2003, it moved to $60 dollar in 2005 and peaked at $148 in 2008. This incredible ride of oil can be explained by different factor such as decreasing US Dollar value against other currencies, declining petroleum reserves, speculation, increasing demand from emerging market and OPEC’s lower than expected increase in production. But after reaching the peak on July, 11th 2008 the price declined consistently falling below $100 on September 2008. Because of the financial crisis world oil demand fell rapidly and in just a couple of months it touched the lowest point at $34. Until April 2009 oil price fluctuated between $35 and $40 and “recovered” to roughly $70 in early 2010.#p#分頁標題#e#

 

Oil as a product

 

People are more familiar with refined oil products such as gasoline, diesel, kerosene and heating oil rather than with crude oil. The basic oil refining process is distillation: “crude oil is heated and oil products bubble off at different temperatures, the lightest at the lowest temperatures and the heaviest at the highest temperatures” [1] . Afterward these products are treated further to make finished oil products such as gasoline kerosene etc. Gasoline is commonly used for cars while kerosene is widely developed for airplanes and household’s illumination heating. Diesel is widespread as combustible for tracks and agricultural machines while heating oil is mainly used for space heating. Oil this different refined products come from crude oil and even if crude oil is considered as a commodity, there are several qualities of crude depending mainly on two different chemical properties: density and sulphur content. Crude oil is therefore divided into heavy or light according to the density level and sweet or sour according to the sulphur content. Nonetheless, in financial market, the three most quoted products are:

 

West Texas Intermediate Crude, WTI - very high-quality, sweet, light crude widely traded in Nord-America

 

Brent Crude – a basket of 15 similar middle-high quality, light, sweet crude oils extracted in the North Sea

 

Dubai Crude - light sour crude oil extracted in Dubai

 

Even though West Texas Intermediate Crude has the highest quality, Brent is used to price two thirds of the world's internationally traded crude oil supplies according to the International Petroleum Exchange (IPE).

 

Oil characteristics: Exhaustibility

 

One of the leading feature of oil is that oil is a non-renewable resource as once it is consumed, it is no longer available. In particular once extracted, oil is consumed quicker that it is naturally produced: oil is therefore not replaceable within short time. Another very important feature is that supply of such as product is limited relative to demand.

 

This two characteristics are essential to understand that oil can only be analyzed through dynamics models and that unlike standards goods, oil provides oil holder a positive premium known as scarcity rent. When demand for crude oil exceeds supply, oil price earns an economic rent due to its scarcity: in other words, it worth keeping oil underground waiting for increase in demand not covered by an increase in supply.

 

The framework which is widely widespread regarding non-renewable resources is the Hotelling model: first introduces in 1931, the model questioned which is the amount of resources that should be extracted during a certain time frame in order to maximize the profit of the resource holder? Assuming no extraction costs, a risk free rate on investment equal to r and a certain price per barrel, according to Hotelling model, the optimum extraction quantity is the one that leads the price of oil to grow over time at a interest rate r. In other words, the resource holder has two opportunities: he can extract oil today or he can leave it underground waiting for a rose in price. Assuming that he decides to extract a certain amount today, he can invest the proceeds at a risk free rate r; otherwise, if oil price is expected to grow at a higher rate than r, the resource holder is not incentivized to extract oil. Thus, if all the resource holders behave the same way, it is highly probably that oil price will increase. Therefore, according to Hotelling models, the optimum extraction is the one in which oil price grows at the rate of interest. This model suggests and implies that oil price will increase over time: due to oil’s exhaustibility oil price must increase as fast as it is consumed.#p#分頁標題#e#

 

Even though Hotelling’s model is commonly used to predict the shape of oil’s trend, one of the most important Hotelling’s assumption is that the reserves of oil are fixed: as can be understood later on in the dissertation, oil reserves calculation is far from being detailed and exhaustive. Oil is extracted as well as found continuously: new reserves become continuously new available resources. Thus, an argument against the Hotelling’ approach is that it is not possible to evaluate scarcity rent and therefore it is not possible to use models such the Hotelling one which are based on this data.

 

Demand and supply.

 

As for any product, the main drivers influencing oil price are demand and supply. In the long term oil price is determined by the match of demand and supply; however, due to the peculiarities of oil, it is really difficult to predict future price: unknown future events, wars, natural events, OPEC decisions on cutting production and demand elasticity shape different demand-supply equilibriums. While price and income are demand’s main drivers, on the supply side it is necessary to take into consideration several factor such as reserves, oil depletion, technologies and oil cartel decisions.

 

Oil Supply

 

In January 2010, global oil supply accounts for 85,8 million barrels per day, out of which 51,6 has been produced by non-OPEC countries.

 

There are different factors that are needed to take into consideration analyzing crude oil demand. Evaluating the supply is more complicated than evaluating the demand as there are different player involved, OPEC and non-OPEC countries and there is the central issue related to oil reserves level. First of all, exporting countries do not incur in any storage’s cost for crude oil as they can simply decide to leave oil underground while importing countries, in order to establish a minimum reserve level, need to built storage facilities. In regard to production countries, the most important and influential player is the Organization of the Petroleum Exporting Countries. While non-OPEC countries act competitively, OPEC is a cartel whose aim is to maximize revenues and profits.

 

OPEC

 

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental organization founded in Baghdad in 1960 and at that time it encompassed 5 countries: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The founding members were later joined by nine other members: Qatar (1961- 2009); Indonesia (1962 - 2009); Socialist Peoples Libyan Arab Jamahiriya (1962); United Arab Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador (1973); Angola (2007) and Gabon (1975–1994). Since 1965 OPEC headquarters is Vienna. It is interesting to highlight that the declared mission of the organization is “to coordinate and unify the petroleum policies of member countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital to those investing in the petroleum industry” [2] .#p#分頁標題#e#

 

In order to understand the relevance of the OPEC countries over oil market, it is important to quantifies to what extend are worldwide oil reserves in OPEC territories: at the end of 2008, world proven crude oil reserves stood at 1,295,085 million barrels, of which 1,027,085 million barrels, or 79.3 per cent, was in OPEC member countries. In 2008 OPEC countries produced around 33 million barrels per day of crude oil, or 45.9 per cent of the world total output [3] . Besides owing the largest oil reserves, OPEC countries have the lowest production costs: roughly $4.00 per barrel for Saudi Arabia or $ 4.50 for Iran, as compared, for example, with $9.85 for the North Sea and $12.50 for Brazil. [4]

 

Non-OPEC countries

 

Non-OPEC countries are generally considered as price taker and even though in the last decade oil price has grown consistently and observers would expects a proportional increase in non-OPEC supply, the response of oil producers countries outside OPEC has been weak. There are several factors that are needed to taken into account in order to understand this behavior: first of all it is becoming more and more costly to develop oil reserves in this countries and the level of technologies needed to increase or at least maintain stable the production output is really high and expensive. Moreover, price volatility has increased uncertainty, changing the risk profile of non-OPEC countries: they are becoming more sensitive to oil price cycle. Investment are therefore asymmetrical: during tremendous increase in oil price, investment are modest, while during a decrease in crude oil price investment rate in exploration or new technologies decrease consistently leading sometimes to underinvestment periods.

 

In order to analyze non-OPEC countries oil supply, it is possible to use a model introduce by Marion King Hubbert in 1956. According to Hubbert model, known also as the Hubbert peak theory, oil production tends to follow a bell-shaped curve which can be divided in three different phases:

 

the first one, the pre-peak phase shows a exponential growth in oil production;

 

around the peak, the production reaches the maximum production level and the production becomes stagnant;

 

in the following phase, the last one, oil production starts a terminal decline due to resource depletion.

 

The peak is reached when half of the oil reserves has been discovered and used: in order to draw the bell-shaped curve, it is necessary to calculate historical cumulative production, discovery rate of new oil deposit and the size of the URR, ultimately recoverable reserves. The main idea of the model is in fact that oil is a finite resources and therefore, when discovery rate is less than the oil consumption rate, oil production starts inexorably to decline with all the related consequences on oil price. The bell curve is drawn considering both the cumulative production and the remaining volume of oil that will be produced as a percentage of the total oil already produced in past. As a consequence it can be used in order to calculate and forecasts oil production and consequently price forecasts.#p#分頁標題#e#

 

According to Hubbert, North America reached the peak point in 1960, while in United Kingdom and Norway the maximum has been touched in 1999.

 

The limits of this approach are related to the difficulties to calculate ultimately recoverable reserves: improvements in technologies and discoveries of new deposits or higher exploitation of existing deposits are pushing the oil peak to the right. Instead of being static, ultimately recoverable reserve is a dynamic measure: underestimation or overestimation of oil reserves as well as higher rate of technological improvements lead to mistakes in calculation of the year in which world will reach the peak oil.

 

Oil reserves

 

A proper forecast of existing oil reserve is a fundamental aspect of oil supply as it is central to Hubbert peak theory. First of all, it is necessary to define the different type of reserves available:

 

Proved reserves are crude oil reserves that once calculated, provide at least with a rate of 90% of certainty at least the oil crude amount estimated. This depends on how accurate are the geological researches

 

Unproven reserves are crude oil reserves similar to proved reserves but for several reasons such as political or contractual are certain for a rate lower of 90%. Therefore unproven reserves are divided into probable reserves which are reserves that are certain for at least 50 % of the amount estimated and possible reserves which are unproven reserves that are certain only for a 10% of the previous amount estimated

 

Given the different definition of oil reserves, it is very important to highlight that there is not a convergence estimation of oil reserves: several studies calculated different reserves level according to different study methods and according to the extent of proved and unproved oil definition. Another distortion of oil reserve calculation is due to the fact that exporting countries are willing to overestimate their reserves because higher are the reserves, higher is the quantity that they can sell or export. Moreover, higher are the reserves declared, higher are the loan that these countries can raise.

 

There is another issue related to the difference between conventional oil and unconventional oil. Unconventional oil refers to the oil extracted using other techniques than the common oil well method such as biofuels, oil shale, oil sands etc.

 

In addition to these, there are reserves of oil that are yet to be discovered but given the current level of technologies are too difficult to be reached and explored.

 

It is therefore clear that oil reserve calculation is really complicated: according to OPEC annual statistical bulletin 2008, world proven crude oil reserve are estimated to be 1,3 trillion barrels out of which 79, 3% are maintained under OPEC countries’ ground [5] . According to the Oil & Gas Journal [6] , in January 2009, proved world oil reserves were estimated at 1,342 billion barrels—10 billion barrels (about 1 percent) higher than the estimation for 2008; 56 percent of the world’s proved oil reserves are in the Middle East while just under 80 percent of the world’s proved reserves are concentrated in eight countries out of which only Canada and Russia are not OPEC members. According to BP Statistical Review Of World Energy of June 2009 proven reserves accounts for 1258 billion barrels,#p#分頁標題#e#

 

AGGIUNGI

 

Oil Demand

 

In 2009 the worldwide oil demand fell by 1.4 percent in comparison to 2008 due to the financial crises that invested mainly OECD countries: this was the biggest drop since early 1980s. During the previous period, 2003-2007 growth rate in oil demand averaged 2,0% per year, 0,8% faster than during the preceding 5 years and 1,2 % faster than it average since 1980 [7] . Around 90% of demand growth during this period came from non-OECD economies. Indeed, OECD demand has been falling year on year since the end of 2005.

 

Daily crude oil demand in early 2010 has reached 86.5 million barrels as the last quarter of 2009 has been the first quarter of demand recovery after 5 consecutive quarters of decline.

 

GO ON

 

Oil market volatility and elasticity

 

Price elasticity to crude oil demand

 

The relationship between oil demand and price can be analyzed looking at elasticity of demand: elasticity measures the relationship between the change in quantity of oil demand for a given change in oil price. As the chart XX shows, both short term and long term price elasticity of demand are really is low ranging from 0 to -0.6. Furthermore it is clear that short term elasticity of oil demand is even smaller with a range from 0 to -0,1. This means that change in oil price have a very little impact on long term crude oil demand an even lighter effects on short term oil demand. The difference between short and long term demand responsiveness to change in oil price is due to bigger rate of substitution and energy conservation in the long term.

 

What is really important to notice is that oil demand may respond asymmetrical to changes in oil price [8] ; in other words there is a substantional difference of demand elasticity for either an increase in price or a decrease in price. For an increase in oil crude price it is expect a reducing demand, but it is not necessarily true that a decreasing oil price would lead to an increase in demand of the same measure: for example an increase in oil price can be exploited in order to invest heavily on innovation and new equipments that would increase oil production leading to a positive impact on price. Last but not least, there is another important aspect concerning demand elasticity that has to be taken into account: the responsiveness of oil demand to a new peak price is different to the responsiveness of oil demand to a price recovering [9] . It is possible to describe two different elasticity scenarios at different price levels:

 

elasticity of demand during increase in oil price that lead to new price records,

 

elasticity of demand during increase in oil price following a low point in price history#p#分頁標題#e#

 

As expected, some studies argues that higher responsiveness of change in oil price can be seen when oil price is reaching new records, while there is a lower elasticity for other changes in price level.

 

Thus, to summarize, elasticity of demand is not always linear, it may respond asymmetrically to changes in oil price and it can be different depending to historical price level.

 

Income elasticity of price crude demand

 

Income elasticity of crude oil demand measures the change in quantity of oil demanded for a given change in income. As the graph xx points out, income elasticity is more responsive in comparison to price elasticity: the long run elasticity ranges from 0,4 to 1,4. Moreover there is an important difference between income elasticity of emerging market and OECD. Emerging markets shows higher income volatility demonstrating how important is oil in their production processes.

 

Spare capacity

 

A very important component and determinant of oil market is oil spare capacity, the amount of excess production that oil producers can bring online quickly. The volume of spare capacity is fundamental as it can be a driver of oil price: spare capacity is in fact utilized to balance excess of oil demand and it can be used to counterbalance temporary oil shock. In other words, spare capacity is a tool that offers flexibility to the market: the higher the spare capacity, the higher is the ability to absorb oil price shock or respond to unexpected increase in demand. Thus in the short term, spare capacity can be exploited to offset increase in demand until oil supply is adjusted to meet demand.

 

As the graph points out , there is an inverse correlation between oil price and spare capacity: high spare capacity level is associated to weak oil price, while when spare capacity is low oil price is expected to be high or increasingly. Spare capacity evolution over years have dropped from 10 million barrel per day of the late 90s to less than 2 million barrel per day or 2% of global oil demand in 2004. In particular, the increase in demand not covered by an increased in supply of non-OPEC countries has been met by OPEC using also spare capacity and therefore diminishing them. As expected, during the credit crunch that took place in late 2008, oil price fell dramatically while the spare capacity increased reaching 6% of global oil demand.

 

According to the International Energy Agency, OPEC spare capacity excluding Iraq, Venezuela and Nigeria, accounts for 5,54 million b/d.. in addition to this, other 5,8 million b/d are estimated to be producible by OPEC countries within 3 months.

 

To sum up, it is clear the role of spare capacity in oil market economy: a relevant inventory allows to maintain the flexibility required in order to play an active role once an oil shock is predicted or strong is conducting price to new records. The key issue is whether it is possible in the current scenario to maintain or even increase spare capacity and which is the player that should take this responsibility. Should oil companies create bigger inventories, even if it is uneconomical from a profit’s maximization point of view to hold higher reserves than needed, or should national oil companies keep bigger reserves?#p#分頁標題#e#

 

Oil demand projections

 

According to the World Economic Outlook of the International Monetary Fund issues in April 2009, global oil demand is expected to grow by 0,6% or 540000 barrel per day per year on average between 2008 and 2014. World oil demand will therefore increase from 85,8 mb/d to 89mb/d while in a more conservative scenario it is expected that demand will remain stable around 85 mb/d depending on how fast and how strongly global recovery will take place.

 

Given the recent historical pattern of oil demand it is highly probable that non OECD countries will drive oil demand growth within the next future; oil consumption in OECD countries will tighten. Asia, Middle East and Latin America will increase their oil demand by 2,6%, from 38,3 mb/d to 44,6 mb/d over 2008 to 2014 on average per year while at the same time, OECD consumptions will declined by 1,1 from 47,5 mb/d to 44,4 mb/d. As the graph points out, by 2013 non-OECD oil demand will be equal to OECD oil demand.

 

The growth in oil demand of non-OECD reflects higher GDP growth expected as well as higher income elasticity to crude oil. In fact in several emerging market, oil price is administered: in Iran for example gasoline costs just €0,8 per liter while OECD countries are usually more responsive to oil price changes

 

Macroeconomic Variables

 

Exchange Rates

 

The relationship between exchange rates and oil prices is complex and it is necessary to note that generally when there is a depreciation of the dollar, oil price expressed in dollar increases. Being dollar the most widespread currency for oil price, a lower exchange rate of the dollar to another currency leads to a minor foreign currency cost of oil causing a rise in oil demand. This increase in demand put upward pressure on the price of oil. Having said that, it is not possible to estimate a precise relationship between oil price and the value of dollar exchange rate: all it is possible to say is that oil price moves roughly proportionally to change in dollar value ceteris paribus. Thus a 10% increase in nominal exchange value of the dollar causes a 10% decrease in oil price expressed in dollar, ceteris paribus. As the graph XX shows, the dramatically decrease in exchange value of the dollar since 2002 and the strong increase of WTI crude oil price in different currencies, would suggest the inverse relationship between oil price and dollar exchange rate is true even if it is not possible to evaluate to what extent. Looking at the relationship between oil price and exchange rate, another important factor that should be taken into account is the decision of leading oil exporters: if dollar depreciates against other currencies, oil exporters’ international purchasing power declines. In order to protect their interest, leading oil exporters tend to tight oil supply, leading to an increase in oil price.#p#分頁標題#e#

 

Another issue that should be taken into consideration looking at the exchange rate is that United States is a major oil producer and oil consumer; an increase in oil price has therefore a double effect: it leads to a deprecations of dollar against the currencies of exporting countries and an appreciation against the currencies oil importing countries. Even if this two divergent movements of exchange rate should be cancelled out each other, in the last years oil imports of oil in the Unites States has soared causing a major concerns in the American capability to respond to and increasing trade deficit influencing negatively the value of the dollar.

 

Interest rates

 

The relationship between oil price and interest rate is not univocal as it is impossible to identify a singular and unique effect of changes in interest rate on oil price. Generally the correlation between these two data is inverse as a decrease of interest rates would lead to increase in price. On the contrary, a decrease of interest rates in order to recover from a financial downturn would lead to a decrease in oil price which would suggest a positive correlation.

 

An explanation of the reason why there is a negative correlation is that an expansionary policy causes a cost reduction of storing cost for commodities goods, driving up the oil price. On the other hand, a change of U.S. interest rate will have an impact on the pegged currencies to U.S. dollar or to the currency currencies which are traded against the American one: too expansionary policy in the U.S. may not be proper to foreign central banks influencing foreign economic growth and consequentially oil prices.

 

Oil price speculation or massive change in oil fundamentals?

 

One of the main issue related to oil price is whether increasing volatility and rise in prices during the last decade has reflected a massive change in oil’s fundamentals or if market speculators played an active role in massive price fluctuations. In particular it is necessary to understand if the oil price reached the high ever level in 2008 due to growing flow of money in oil derivatives or due to enormous change in underlying fundamentals, supply and demand. An increase from $28 per barrel in early 2002 to over $100 per barrel at the end of 2007, heading to the record $140 in 2008 and then falling below €40 by the end of 2008 is the result of the burst of an energy bubble or it the natural evolution of oil price during a worldwide financial crises? In other words, it needs to be investigated if the strong increase followed by the collapse in oil price is a cause or a result of the main worldwide financial crises.

 

As analyzed in the first part of the dissertation, oil’s demand and supply during the period 2002 and 2008 changed significantly: emerging countries such as China and India drove oil demand while at the same time, oil suppliers reacted slowly and they tighten spare capacity. Those that support oil demand as the main driver in oil price shock argue that oil was not the only commodity that rose dramatically during the period; many commodities’ price followed the same growth pattern and some of them are not even traded on future market: iron and steel for example. On the other hand, it is not possible to deny that since early 90s, oil industry has changed dramatically due to the entry of new financial players that thanks to financial engineering have started to invest heavily in commodities, including oil market.#p#分頁標題#e#

 

Oil derivatives Market

 

Open Interest

 

In order to understand the size of oil future market, one measure is to calculate the value of the total open interest. The open interest of a future contract at a particular time is the number of long position outstanding; equivalently it is the total number of short position outstanding [10] . Since 1990, exchange traded open interest (futures contract only and across all maturities) in crude oil rose from 285,000 contracts to the highest peak of 1,550,000 in 2007 and got back to around 1,200,000 in 2009-2010. This means that the open interest rose at a rate of 8% year over year. Considering that a single contract is for 1,000 barrels, it is easy to understand that oil future contract accounted for 285 million barrel in 1990 and reached 1,55 billion barrel in 2007. Then, by multiplying numbers of barrel per cost of barrel we discover total market value of future contracts: during the 2008 peak, oil future contracts exchanged counted for $190 billion.

 

Futures are not the only financial instruments which are traded, in addition to these, it needs to take into account also oil options: “this would add another 40% of open interest to the figure in 2000, another 52% in 2004 and would have more than doubled total exposure in 2008” [11] .

 

A main issue related to open interest estimation is it is necessary to add also swap dealer activities:

 

Even in entering into a swap contract is similar to entering into a future or option position and therefore creating an oil price exposure, swap dealers can privately enter into position: this activities is not reported in CFTC summaries and no data on volume and terms are public available.

 

As a matter of fact, the data of table xxx are clearly an underestimation of the real size of the open interest in crude oil as it does not take into account all the positions negotiated off the exchange and it is not possible to evaluate to what extent these data are underestimated.

 

But a fundamental issue related to the fact that open interest graph alone does not provide a comprehensive information regarding the market participants: in other words, it does not allow to identify hedger and speculator.

 

In order to solve this matter, since September 2008, the Commodity Future Trading Commission which is an independent agency of the U.S whose purpose is “to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets” [12] , publishes a weekly report that identifies daily individual trader positions at various contract maturities and classifies the traders according to their underlying business . Market operators are divided into three categories: “commercials", "non-commercials”, and “non-reportables”. The COT, Commitment of Traders reports provide information on the size and the direction of the positions taken, across all maturities, by three categories of futures traders. Commercial traders category, which is composed by commercial producers, commercial manufacturers, commercial dealers and swap dealers, refers to those who use futures or option contracts in a given commodity for hedging purposes: they hold positions in both the underlying commodity and in the futures or options crude oil contracts. On the contrary, non-commercial traders category, which is composed by hedge funds, floor broker & traders refers to those market players with no interest in the underlying asset or its financial equivalent as they hold only positions in futures (or options) contracts. Finally, non-reportable positions are those held by too small traders to be accounted by CFTC.#p#分頁標題#e#

 

Although commercial traders are typically considered hedgers and non-commercial traders are considered speculators, there is uncertainty regarding the role of commercial swap dealers: acting as intermediary to hedger or speculators, they are exempt from position limits imposed to speculator and they are classified as commercials.

 

The graphs XX e yy show the breakdown of the total open interest in WTI crude oil futures and futures-equivalent options positions for the three categories, commercial, non-commercial and non-reportable trader during years 2000 and 2009. The graphs clearly highlight a decreasing importance of commercial traders for both long and short positions: long and short positions for commercial traders fell from 75% of the total open interest in 2000 to 55% in 2009 while non-commercial traders importance grew in the same time frame from roughly 75% to 55%. Non-commercial spread positions e.g. calendar spread positions which is a “futures/option spread trade involving the purchase of futures/ options of an underlying market expiring in some named month, and the simultaneous sale of other futures/options of the same underlying market and the same striking price in a different month” [13] , rose from 6% of total open interest in 2000 to over 23% in 2009.

 

The graph XXX describes the relationship between net position of non-commercial traders and the oil price. A positive net open position represents a long net position while a negative net open position stands for a net short position. It is possible to note that when non-commercial traders are net short, the price of the underlying generally decrease while. The size of the decrease is not always proportional and sometimes is weak. On the contrary, when non-commercial traders are net long, the increase in oil price becomes more noticeable. Since 2003, oil market shows a persistent net long position which coincides with a the strong increase in oil price that characterized oil market. But this evidence is not sufficient to demonstrate that non-commercial traders are able to massively influence oil prices: the similar trend of net open positions and the oil prices can be explained as a change of market fundamentals that influence both oil and derivatives oil price. Change in expectations of demand and supply lead to change in investing activities of both commercial and non-commercial players: this view is shared by Craig Donohue, the CEO of CME Group which is the world’s largest commodities exchange, who states: “any empirical evidence that index funds and speculators distort prices, as has been widely alleged” [14] . Moreover there is general view that speculators own high quality information and that they are able to respond quicker than any other market participants to new information. Instead of destabilizing the market, this increase market efficiency.

 

But it is still fundamental to understand the reason for the huge increase of importance in non-commercial oil future derivatives. One of the explanation is that crude oil has become more and more attractive for portfolio diversification purpose as it is low or even negative correlated to other financial asset’s returns: the graph shows that the quarterly, 1 year and 5 years correlation of commodity futures return to SP 500 and long term bonds is negative. “While it is not possible to reject the hypothesis that the correlation of commodity futures with stocks is zero at short horizons, these findings suggest that commodity futures are effective in diversifying equity and bond portfolios”. [15] Thus, pension funds and insurance companies have heavily invested in commodities derivatives. Moreover it is important to highlight the positive correlation of future oil commodities to inflation:#p#分頁標題#e#

 

“Commodity futures might be a better inflation hedge than stocks or bonds. First, because commodity futures represent a bet on commodity prices, they are directly linked to the components of inflation. Second, because futures prices include information about foreseeable trends in commodity prices, they rise and fall with unexpected deviations from components of inflation.” [16] .

 

Another fact which may explain the increasing importance of oil derivatives is financial innovation that allows to a wide range of institutional and non institutional investors to enter into oil futures derivatives.