Publication year: 2011Source: Energy Policy, In Press, Corrected Proof, Available online 20 February 2011Damir, TokicThis article examines how the interaction of different participants in the crude oil futures markets affects the crude oil price efficiency. Normally, the commercial market participants, such as oil producers and oil consumers, act as arbitrageurs and ensure that the price of crude oil remains within the fundamental value range. However, institutional investors that invest in crude oil to diversify their portfolios and/or hedge inflation can destabilize the interaction among commercial participants and liquidity-providing speculators. We argue that institutional investors can impose limits to arbitrage, particularly during the financial crisis when the investment demand for commodities is particularly strong. In... Research Highlights: ► This article finds that commercial hedgers at least contributed to the 2008 oil bubble. ► Commercial hedgers were aggressively offsetting their short hedges leading to the oil bubble peak. ► Commercial hedgers, thus, unwillingly engaged in positive feedback trading. ► Institutional investors potentially destabilized the oil markets in 2008.