A Volatility Method of Crude Oil Dynamics: The Role of Market and Commodity Volatilities in Determining Equilibrium Prices

This paper introduces a novel volatility-driven method for pricing crude oil, focusing on the relationship between stock market and commodity price volatilities. By modeling the spot price dynamics as a linear combination of market and commodity volatilities, the study establishes equilibrium conditions in the financial system. Through a detailed analysis of the dynamics of $A(t,T)$ and $B(t,T)$, we show how these functions trace similar paths, reflecting the equilibrium between oil market volatility and underlying commodity risk. Our results suggest that the relationship between financial market volatilities and real economic forces provides new insights into pricing mechanisms. JEL Classification. G13, C22, Q41