Selected aspects of price formation in commodity markets

The thesis is driven by the strategic importance of crude oil, and aims to contribute to the knowledge on crude oil pricing and markets by conducting three investigative undertakings. The first examines the ability of crude petroleum to act as a safe haven asset for investors in equity markets around the start of international violent conflicts and wars. The second investigates the price differentials between US domestic benchmark crudes and the global marker Brent around the start of upstream production disruptions. The third empirical examination explores the presence of abnormal behaviour in the vicinity of the start dates of US sanctions on net exporting and importing nations, and builds on these findings to estimate gains accrued to, and losses inflicted on, the US economy. The thesis reports a number of findings. First, it shows that crude oil prices register a significant abnormal rise around the start of violent conflicts and wars. The significant portion of this abnormal increase accumulates well before the outbreak of crises. The thesis also reports a significant abnormal decline in the valuations of US and international equities around the start of these events. Secondly, the thesis builds on these findings, and demonstrates that crude oil possesses the ability to act as a safe haven from stock markets around the start of these events. Third, the thesis reports significant tightening in the price spreads around the start of unscheduled production outages. These findings are shown to be robust even after accounting for extreme weather conditions, changes in petroleum stocks, and costs of logistics. Fourth, the thesis reports significant abnormal changes in the valuations of crude oil around the start of US sanctions. The direction and magnitude of these changes depend on whether the targeted nation is a net exporter or importer. Fifth, the thesis builds on these findings, and reports gains and losses to the US economy due to the imposition of sanctions. These findings contribute to the academic literature, and highlight a number of implications for equity investors, insurance companies, oil traders, and policy makers in the US and other net importing and exporting nations. These implications concern the energy security of the US and other nations, the use of oil in hedging and diversification, the role of benchmarks in pricing, and the economic consequences of the US foreign policy.