## Recent Dynamics of Crude Oil Prices

_IMF Working Papers, December 1, 2006_

## Source details

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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

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### 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.

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## Content in this bundle

- **Recent Dynamics of Crude Oil Prices; Noureddine Krichene; IMF Working Paper 06/299; December 1, 2006**
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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/recent-dynamics-of-crude-oil-prices-20195_