The summer 2008 spike in crude oil prices to $147/bbl, followed by a steep correction in late 2008/early-2009 and subsequent sharp rebound over the last three years have jolted the world economy and pinched consumers at the fuel pump. Given the importance of crude oil in the world economy, the pace of change of prices generated substantial attention from regulators, legislators and commentators who have decried the existence of ‘excessive’ speculation in the crude oil futures markets. Indeed, the rise in participation by non-commercial traders during the preceding ten years provided further ammunition for those seeking causal connection with concurrent price increases.

The debate on linkages between financial and physical oil markets has evolved over time. Opinion remains polarised between those attributing recent price movements largely due to oil market fundamentals and those who see speculative activity and the financialisation of commodities as amplifying price shifts in the short run. Despite the lack of a clear consensus, significant new regulatory measures aimed at reducing systemic risk in financial markets are being developed, which may substantially limit the participation of non-commercial players within commodity derivatives markets, thereby affecting the functioning of these markets.

Furthermore, the correlation between individual commodities and other asset classes, including equities and exchange rates, has been gradually increasing over the last few years. Some suggested that hedge funds played an important role in causing these cross market linkages. However, others argued that the increase in correlation is concentrated among indexed commodities, which suggests that this has more to do with the attractiveness of commodity index investments.

Bahattin Buyuksahin, during his FEEM lecture entitled "The Price of Oil: Fundamentals vs Speculation and Data vs Politics", will discuss his research as well as recent studies on commodity price formation, correlation between commodity and equity prices, the effect of OPEC fair price announcements on oil prices and developments in regulatory reform in the energy derivatives markets.