Abstract—Crude oil as energy source is imperative for running economies and sustaining economic growth. The price of this commodity therefore impacts both on exporting and importing countries. The mechanism of price formation is very complex and varies in accordance with supply and demand structure for physical oil whereas paper trading activity including speculation of forwards, futures, options and swaps has also become huge part business directing price of crude oil depending on financial circumstances of the market. This paper is addressing the basic principle of crude oil price formation. Itis underlined that price of crude oil is no longer simple reflection of fundamental factors of the market based on supply and demand factors, it is the outcome of intervention of big financial market players into the industry.

Index Terms—Crude oil pricing, paper trading, paper market

Magsud Ibrahimov and Jamila Muradasilova are with the University of Liverpool, Azerbaijan (e-mail: magsudibrahimov@gmail.com)

Cite: Magsud Ibrahimov and Jamila Muradasilova, "Crude Oil Price Security: How Crude Oil Price is Formed?," International Journal of e-Education, e-Business, e-Management and e-Learning vol. 2, no. 4, pp. 339-342, 2012.