IEA experts examine fluctuations in commodity prices

21 March 2011

The view that speculators are the main force behind fluctuations in commodity prices, such as crude oil, has been challenged by new analysis conducted by experts at the International Energy Agency (IEA).

The IEA research indicates that market fundamentals – all factors which affect the balance between supply and demand – are still primary drivers behind changes in commodity prices in recent years.

This analysis features in the latest Oil Market Report (OMR), a monthly IEA publication which provides a view of the state of the international oil market.

Comparing performances

The IEA’s research focused on comparing the performance of crude oil, which is an exchange-traded commodity, with a selection of seven non-exchange traded commodities, including coal and rice, between 2000 and 2010.

An exchange-traded commodity is traded on an exchange which is controlled by rules and regulations, such as the New York Mercantile Exchange (NYMEX). A non-exchange traded commodity is traded between physical buyers and sellers outside of such an exchange. (Speculators mainly focus on commodity derivatives, most of which are traded on exchanges.)


The results of the IEA’s analysis, however, show that the price of crude oil fluctuated in a similar pattern to the seven non-exchange traded commodities throughout the decade. This suggests that speculation is not the only cause of volatility and that market fundamentals, notably strongly growing demand in emerging markets, are also at play.

The analysis indicates that prices for the non-exchange-traded commodities rose faster than crude oil prices between 2006 and 2008.

Unusually high volatility in commodity markets post-2007 does not appear unique to crude oil traded on exchanges. Other commodities that are not traded in exchanges experienced similar fluctuations and price surges in the second part of 2000s. Moreover, volatility declined for both crude and non exchange-traded commodities in 2010.

For the past decade, many have tried to blame speculative oil traders for causing fluctuations in oil prices. As a result, policy-makers have responded to this point of view with a bevy of proposals that aim to control the activity of speculative traders. This recent IEA study casts doubt over both this pervasive view and the effectiveness of such policies.

Previous IEA analysis suggests that other factors, such as data transparency and market distortions within the physical market may be at least as important in causing oil price volatility.

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Photo: Oil rig. © GraphicObsession