Role of Energy Futures Markets: Hedging Effectiveness against Speculative Forces

Abstract

When crude oil price was skyrocketing toward 150 dollars per barrel in 2008, commodity-market regulators began to investigate whether energy-market players were injecting false data into the marketplace to influence perceptions about energy market supply and demand. Of course, this investigation was mainly prodded by public outcry and Congress searching for villains of the day. One aspect of the concerns of the regulators was that companies might be reporting inventory levels that were inaccurate to benefit their own trading positions. For example, a company could theoretically underreport barrels in their tanks at a key hub to suggest oil was scarcer than it really was, and then sold its physical oil at a premium when oil prices jump on misleading news. Another concern was whether companies conduct some physical oil sales and purchases solely to influence short-term pricing on energy markets.