The Oil Drum

This is a guest post by Shunyata. Shunyata is a manager of financial derivatives with training in financial engineering, actuarial science, statistics, and mechanical engineering. While he does not work directly with commodity markets, his background in financial engineering gives him insight into the operation of oil markets that may be helpful.

The observations below represents Shunyata's opinions based on his study of commodity derivatives to protect his personal interests. Commodity derivatives are exceedingly complicated, and his direct expertise is with respect to financial derivatives. This post is not intended to represent investment advice.

What Can the Commodity Market Tell Us about Peak Oil?

Market Consensus

A common view is that market prices reflect the market consensus about future prospects. This is a dangerous misunderstanding from several standpoints.

Consensus is an equilibrium statement, but equilibrium is non-existent in reality. There is the obvious problem of new information constantly disrupting the market. More importantly, the market contains a hidden, complex structure of players:

• There are large, in-the-know entities who act opportunistically, seemingly at random;

• There are hedgers who react to market moves mechanically and in unison (no disparagement intended);

• There are diverse small players who respond slowly in diverse ways, etc.