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Speculation in the oil market

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  • Luciana Juvenal
  • Ivan Petrella

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.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2011-027.

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Date of creation: 2011
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Handle: RePEc:fip:fedlwp:2011-027

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Keywords: Petroleum products - Prices ; Vector autoregression ; Speculation;

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References

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Citations

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Cited by:
  1. Luciana Juvenal & Ivan Petrella, 2012. "Speculation in the oil market," Economic Synopses, Federal Reserve Bank of St. Louis.
  2. Irwin, Scott H. & Sanders, Dwight R., 2012. "Financialization and Structural Change in Commodity Futures Markets," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 44(03), August.
  3. Selien De Schryder & Gert Peersman, 2013. "The U.S. Dollar Exchange Rate and the Demand for Oil," CESifo Working Paper Series 4126, CESifo Group Munich.
  4. Claudio Morana, 2012. "Oil Price Dynamics, Macro-Finance Interactions and the Role of Financial Speculation," Working Papers 2012.07, Fondazione Eni Enrico Mattei.
  5. Yannick Le Pen & Benoît Sévi, 2013. "Futures Trading and the Excess Comovement of Commodity Prices," AMSE Working Papers 1301, Aix-Marseille School of Economics, Marseille, France, revised Jan 2013.
  6. Yannick Le Pen & Benoît Sévi, 2013. "Futures Trading and the Excess Comovement of Commodity Prices," Working Papers halshs-00793724, HAL.

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