Recent Dynamics of Crude Oil Prices
IMF Working Papers, December 1, 2006
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Bibliographic details
- Authors: Noureddine Krichene
- Published: December 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451865592.001
Summary findings
- Crude oil prices have been on a run-up spree in recent years.
- Price dynamics were characterized by:
- high volatility,
- high intensity jumps,
- strong upward drift.
- These features indicate that oil markets were constantly out-of-equilibrium.
- Pressure on oil prices is viewed mainly as a result of:
- rigid crude oil supply,
- an expanding world demand for crude oil.
- A change in the oil price process parameters would require a change in the underlying fundamentals.
Market expectations and option-implied information
- Market expectations were extracted from call and put option prices.
- Options-implied expectations anticipated:
- no change, in the short term, in the underlying fundamentals;
- continued volatility and jumpy behavior of oil prices;
- higher probabilities that oil prices would rise, rather than fall, above the expected mean.
Explanation and modeling approach
- The paper provides an explanation of the oil price process in terms of underlying fundamentals of oil markets and the world economy.
- Modeling and analytical elements highlighted in keywords include:
- Asset prices, Characteristic function, cumulants, drift,
- Fourier inversion, Fourier transform,
- Futures, futures price,
- inelasticities of oil demand and supply, jump-diffusion,
- kurtosis, modeling asset price, oil price density, oil price dynamics,
- option pricing, option value, Options, price density,
- return process, skewness, state price density, variance-gamma distribution, volatility.
Implications and policy considerations
- Because oil price process parameters are driven by supply and demand fundamentals, policy-relevant implications include:
- to alter the oil price process meaningfully, interventions or structural changes must affect crude oil supply rigidity or global demand expansion;
- in the short term, reliance on market option prices suggests limited expectations of fundamental change and an elevated risk of upward price moves and jumps.
Content in this bundle
- Recent Dynamics of Crude Oil Prices; Noureddine Krichene; IMF Working Paper 06/299; December 1, 2006