Speculation without oil stockpiling as a signature: a dynamic perspective

According to the standard analysis of commodity prices, stockpiling is a necessary signature of speculation. This paper develops an approach suggesting that speculation may temporarily (e.g. during a few months) push crude oil prices above the level justified by physical‐market fundamentals, without necessarily resulting in a significant increase in oil inventories. Looking beyond debate on the value of oil‐demand price‐elasticity, showing a demand curve makes sense only if we consider a fixed time horizon (e.g. short‐run). The scenario of oil demand slowly but continuously adjusting to a price fuelled by speculation implies that price elasticity of demand is an increasing function of the time horizon considered. Short‐ and long‐run elasticities can then be used to calibrate this function. A very low very‐short‐run price elasticity suggests that an exogenously‐driven rise in crude oil price has a very slight impact on demand in the very short run and therefore, with supply constant, leads to a minimal increase in inventories. This interpretation differs from the traditional view according to which storage of just a few barrels is enough to raise prices when elasticity is very low. We present several analytical and numerical illustrations (with oil‐demand adjustment following Gompertz, logistic and exponential paths). The role that speculation may have played in recent movements in oil prices is also discussed.