Speculation in the Oil Market

Ivan Petrella and Luciana Juvenal

No 9808, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 dynamic factor model (DFM). 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 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. (iii) The comovement between oil prices and the prices of other commodities is mainly explained by global demand shocks. 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; Dfm (search for similar items in EconPapers)
JEL-codes: C32 D84 Q41 Q43 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-ene
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Citations: View citations in EconPapers (51)

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Related works:
Journal Article: Speculation in the Oil Market (2015)
Journal Article: Speculation in the oil market (2012)
Working Paper: Speculation in the oil market (2011)
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