Importance of Demand and Supply Shocks for Oil Price Variations

Lin Ma ()
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Lin Ma: School of Economics and Business, Norwegian University of Life Sciences, Postal: Norwegian University of Life Sciences, School of Economics and Business, P.O. Box 5003 NMBU, N-1432 Ås, Norway

No 10-2018, Working Paper Series from Norwegian University of Life Sciences, School of Economics and Business

Abstract: This paper studies the importance of demand and supply shocks in the oil market, and tries to explain the formation of the short-run oil price by applying an extended commodity storage model to the cyclical components of the price. First, I employ a multivariate method to extract the cyclical component of the oil price, world oil consumption, and global GDP. Next, I find a large and positive effect of global GDP shock on the oil price cycles in a VAR model. Then, I estimate the commodity storage model using a moment-matching method. All parameters are estimated significantly, and the model shows good capability of reproducing the volatility and persistence of oil pricecycles. IfindthattheGDPshockgeneratesamuchmoremoderateeffectontheoil price cycles in the extended commodity storage model than the empirical evidence from the VAR analysis, and the production shock plays an important role for the variance of the cyclical component of the oil price.

Keywords: Oilprice; demandshock; supplyshock; competitivestorage model; BeverageNelson decomposition; simulated method of moments (search for similar items in EconPapers)
JEL-codes: C15 G10 O13 Q40 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2018-09-17
New Economics Papers: this item is included in nep-ene
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:nlsseb:2018_010

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