Fundamentals, Non‐Fundamentals and the Oil Price Changes in 2007–2009 and 2014–2015

The fast increase in oil prices in the past 15 years and the spectacular fall in 2008 and in 2014 has led to the rethinking of supply and demand as the only determinant price. It has been observed in the last decade that large financial institutions, hedge funds, index funds and other investment funds invest billions of dollars in the futures market benefiting from the changes in oil prices. We considered the net long position of each trader category in the New York Mercantile Exchange to estimate, through the Vector Error Correction Model (VECM), the impact of each category on oil price and on volatility. Similarly, we also consider quarterly world oil demand, supply, inventories and industrial production from 1993 and 2015. The results show that fundamental variables have a strong and long‐lasting relationship with oil price. Unlike the fundamental variables, the non‐fundamental variables very quickly became stable and react in a different way when the prices of oil rise and fall. The results show that the main factor for the increase of the price in 2008 was the higher than expected demand. For the 2014 decline the VECM shows that supply is the main force behind it. The non‐fundamental variables together can explain almost 11 per cent of the variations of the price in 2008–2009. However, for the 2014–2015 period, the non‐fundamental combined explained only 5 per cent. The non‐fundamental have low share in the changes in oil price despite having a strong effect on volatility.