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Published September 2015 | public
Journal Article

Information Arrival and the Oil Price Collapse

Abstract

Between late July 2014 and March 2015, the price of West Texas intermediate crude oil (WTI) fell by almost 60%. It is hardly surprising that such a dramatic drop in the price of an important resource led to a great deal of analysis of its cause and consequences. Examples include the work of Areski and Blanchard [2014], Baumeister and Kilian [2015], Cashin et al. [2014], Kilian [2014], and the World Bank [2014]. All of these articles are based on fundamental economic analysis, in that they examine the factors that affect the supply and demand for oil, such as GDP growth, the energy intensity of GDP, changes in oil production technology, producing nations' revenue requirements, and geopolitical forces. Here I take a different approach by applying a finance perspective. As Areski et al. [2014] observe, oil can be thought of both as a fundamental commodity and a financial asset. From this perspective, the price of oil is like the price of any other financial asset. Assuming that the oil market is relatively efficient, new information must enter the market for the price of crude to change by more than the minimal amount associated with normal carry. To what new information was the market responding during the dramatic price collapse between late July 2014 and March 2015?

Additional Information

© 2015 Institutional Investor LLC. I would like to thank John Haut for both research assistance and helpful comments.

Additional details

Created:
August 20, 2023
Modified:
October 25, 2023