Crude oil prices outlook: market liquidity and trading volumes

More from Nauman’s note at InvestBank

The Crude oil market like any other financial market is also a function of available liquidity in the system. Considering trading volumes as a proxy to the market liquidity, there was a marked increase observed in oil trading volumes during the later part of 2006, leading to an increase in prices. Figure-12 trends this behavior.









So what changed in 2006 that volumes first doubled and then tripled from Q1 2006 volumes? The WTI contract started trading at ICE, an offshore, pseudo un-regulated market. You can now play this fact both ways, depending on which camp you belong to. Higher volumes and the absence of regulatory intervention finally led to true price discovery (votes anyone), or higher volume and absence of regulatory intervention led to the building of an asset bubble funded by investors and speculators looking for a quick momentum win (votes anyone). And across these years you can see that as prices rise, the increase volume could indicate market participants rushing to cover their exposure or investors and speculators rushing to get on the momentum trade.

So in view with the data and the factors shared earlier, are we setting ourselves up for another 2008 and a price collapse in the crude oil market, or this time the world is truly going to run out of oil?