Speculation in the Oil Market

FRB of St. Louis Working Paper No. 2011-027E

61 Pages Posted: 13 Apr 2012 Last revised: 26 Jul 2012

See all articles by Luciana Juvenal

Luciana Juvenal

Federal Reserve Bank of Saint Louis

Ivan Petrella

Warwick Business School, University of Warwick; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2011

Abstract

The run-up in oil prices since 2004 coincided with growing investment in commodity markets and increased price comovement among different commodities. We assess whether speculation in the oil market played a role in driving this salient empirical pattern. We identify oil shocks from a large dataset using a factor-augmented vector autoregressive (FAVAR) model. This method is motivated by the fact that a small scale VAR is not infomationally sufficient to identify the shocks. The main results are as follows: (i) While global demand shocks account for the largest share of oil price fluctuations, speculative shocks are the second most important driver. (ii) The comovement between oil prices and the prices of other commodities is mainly explained by global demand shocks. (iii) The increase in oil prices over the last decade is mainly driven by the strength of global demand. However, speculation played a significant role in the oil price increase between 2004 and 2008 and its subsequent collapse. Our results support the view that the recent oil price increase is mainly driven by the strength of global demand but that the financialization process of commodity markets also played a role.

Keywords: Oil Prices, Speculation, FAVAR

JEL Classification: Q41, Q43, D84, C32

Suggested Citation

Juvenal, Luciana and Petrella, Ivan, Speculation in the Oil Market (October 1, 2011). FRB of St. Louis Working Paper No. 2011-027E, Available at SSRN: https://ssrn.com/abstract=2038977 or http://dx.doi.org/10.2139/ssrn.2038977

Luciana Juvenal (Contact Author)

Federal Reserve Bank of Saint Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Ivan Petrella

Warwick Business School, University of Warwick ( email )

Coventry CV4 7AL
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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