ABSTRACT
Traditional economics postulates that the price of commodities such as oil is determined by the equilibrium between consumer demand for physical barrels and supply of these barrels by producers. As both consumers and producers actively hedge their risks using nancial instruments in order to reduce uncertainty, demand and supply for ‘paper’ barrels is created. Additional external capital is then required to absorb volatility and smooth price uctuations caused by temporary supply and demand imbalances. is capital is more eciently provided by investors via the futures and swap market to avoid extra costs associated with handling physical oil.
