Crude oil prices have been on a run-up spree in recent years. Their dynamics were characterized by high volatility, high intensity jumps, and strong upward drift, indicating that oil markets were constantly out-of-equilibrium. An explanation of the oil price process in terms of the underlying fundamentals of oil markets and world economy was provided, viewing pressure on oil prices mainly as a result of rigid crude oil supply and an expanding world demand for crude oil. A change in the oil price process parameters would require a change in the underlying fundamentals. Market expectations, extracted from call and put option prices, anticipated no change, in the short term, in the underlying fundamentals. Markets expected oil prices to remain volatile and jumpy, and with higher probabilities, to rise, rather than fall, above the expected mean.
sample period and highly expansionary monetary policies caused demand for crude oil to expand at similar pace. In view of the priceinelasticitiesofoildemandandsupply, any small excess demand (supply) would require a large price increase (decrease) to clear oil markets; hence, the observed high intensity of jumps and the strong drive for oil prices to rise.
Attention was not only limited to historical dynamics of oil prices, but it was also extended to gauging market expectations regarding future developments in these prices. Based on call and put option prices