Speculation in the oil market

Luciana Juvenal and Ivan Petrella

No 2011-027, Working Papers from Federal Reserve Bank of St. Louis

Abstract: The run-up in oil prices after 2004 coincided with a growing flow of investment to commodity markets and an increased price comovement between different commodities. We analyze whether speculation in the oil market played a key role in driving this salient empirical pattern. We identify oil shocks from a large dataset using a factor-augmented autoregressive (FAVAR) model. We analyze the role of speculation in comparison to supply and demand forces as drivers of oil prices. The main results are as follows: (i) While global demand shocks account for the largest share of oil price fluctuations, financial speculative demand shocks are the second most important driver. (ii) The comovement between oil prices and the price of other commodities is explained by global demand and financial speculative demand shocks. (iii) The increase in oil prices in the last decade is mainly explained by the strength of global demand. However, financial 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 financialization process of commodity markets explains part of the recent increase in oil prices.

Keywords: Petroleum products - Prices; Vector autoregression; Speculation (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-bec and nep-ene
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Citations: View citations in EconPapers (48)

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Related works:
Journal Article: Speculation in the Oil Market (2015)
Working Paper: Speculation in the Oil Market (2014)
Journal Article: Speculation in the oil market (2012)
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DOI: 10.20955/wp.2011.027

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