Oil price futures tops analysts’ agenda

The peculiar thing is, each could be correct at some point this year. Oil prices, now at about $45 a barrel, can be extremely volatile, spiking and plunging within weeks. If they were not, the current level of uncertainty might seem much less rational. Where does the volatility come from, though, and is it likely to persist?

The first question has some obvious answers. The market for oil carries more risk of huge shocks to supply and demand than most markets for commodities. Sure, it is possible that scientists will someday discover that orange juice causes cancer, but that thought probably doesn’t keep many traders up at night.

The demand for oil, however, could be hurt in an instant — for example, if someone invented a portable cold fusion generator that could safely power a car or heat a house. It would take time for countries to switch to the new power source, and oil would still be needed for producing plastics and other products, but the writing would be on the wall.

There is clearly plenty of room for unexpected turns in the price of oil, and perhaps that justifies the huge range in predictions.

Yet, according to Stephen Figlewski, a professor of finance at New York University, uncertainty can actually increase volatility.

— NYT