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Risk premium in the era of shale oil

Fabrizio Ferriani (), Filippo Natoli (), Giovanni Veronese () and Federica Zeni ()
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Giovanni Veronese: Bank of Italy
Federica Zeni: Bank of Italy

No 1215, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: The boom in the production of shale oil in the United States has triggered a structural transformation of the oil market. We show, both theoretically and empirically, that this process has significant consequences for oil risk premium. We construct a model based on shale producers interacting with financial speculators in the futures market. Compared to conventional oil, shale oil technology is more flexible, but producers have higher risk aversion and face additional costs due to their reliance on external finance. Our model helps to explain the observed pattern of aggregate hedging by US oil companies in the last decade. The empirical analysis shows that the hedging pressure of shale producers has become more important than that of conventional producers in explaining the oil futures risk premium.

Keywords: shale oil; futures; risk premium; hedging; speculation; limits to arbitrage. (search for similar items in EconPapers)
JEL-codes: G00 G13 G32 Q43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-rmg and nep-upt
Date: 2019-04
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