Working Paper: CEPR ID: DP9808
Authors: Luciana Juvenal; Ivan Petrella
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: DFM; Oil Prices; Speculation
JEL Codes: C32; D84; Q41; Q43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| global demand shocks (F69) | oil price fluctuations (Q31) |
| speculative shocks (D84) | oil price fluctuations (Q31) |
| global demand shocks (F69) | speculative shocks (D84) |
| speculative shocks (D84) | producers' behavior (D21) |
| producers' behavior (D21) | current spot oil prices (Q31) |
| global demand shocks (F69) | comovement between oil prices and other commodities (Q02) |
| speculative shocks (D84) | comovement between oil prices and other commodities (Q02) |