Oil Market Dynamics in Turbulent Times
This presentation analyses the impact of the recent oil market disruption on oil market dynamics and price behaviour. It makes the following observations. In historical perspective, the current oil market disruption has been small so far. However, the main concern for the market is the geopolitical context in which the disruption has occurred. There are fears that current events would engulf other key oil exporters. These have caused market players to update their beliefs about the probability of disruptions from the region. This process of updating beliefs plus the fact that there has been an actual loss of output has induced changes in price levels. While sharp price rises and increased volatility have raised doubts about the effectiveness of the market mechanisms and the role of speculators in the oil price formation process, the fact remains that the oil market has shown great resilience in dealing with the Libyan physical disruption. This has occurred mainly through adjustment in price differentials between crude oil markets, time spreads, crude and products markets and between various petroleum products. Movements in price levels have been less important than price differentials for the adjustment process with these movements reflecting an increased perception of lack of feedbacks from demand and supply that are needed to put a ceiling on the oil price.