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
There are 2 versions of this paper
Speculation in the Oil Market
Speculation in the Oil Market
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Imperfect Competition and the Effects of Energy Price Increases on Economic Activity
-
Not All Oil Price Shocks are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market
By Lutz Kilian
-
Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative
By Robert Barsky and Lutz Kilian
-
Oil and the Macroeconomy Since the 1970s
By Robert Barsky and Lutz Kilian
-
Oil and the Macroeconomy Since the 1970s
By Robert Barsky and Lutz Kilian
-
The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s so Different from the 1970s?
By Olivier J. Blanchard and Jordi Galí
-
The Macroeconomic Effects of Oil Shocks: Why are the 2000s so Different from the 1970s?
By Olivier J. Blanchard and Jordi Galí
-
The Macroeconomic Effects of Oil Shocks: Why are the 2000s so Different from the 1970s?
By Olivier J. Blanchard and Jordi Galí
-
Exogenous Oil Supply Shocks: How Big are They and How Much Do They Matter for the Us Economy?
By Lutz Kilian