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Non-linearities in oil prices: which conditions matter?

Author

Listed:
  • Burian, Vlad
  • Stalla-Bourdillon, Arthur

Abstract

Over recent years we have observed that different oil market states can significantly influence how oil prices respond to shocks. Using a non-linear local projections framework, we find that oil prices react more strongly to oil supply shocks when key state variables – namely, investment fund positions, supply-demand imbalances and oil inventories – are at extreme levels, regardless of the sign of the shock. Further distinguishing between the sign of the shock and whether a state variable is unusually high or low provides additional insights. Upside risks to oil prices are most critical when oil supply is tight relative to demand, and investors hold very long positions at the time of an oil price surge. Conversely, downside risks are most pronounced when oil prices start to decrease in an environment of ample supply, and investors hold very short positions, leading to particularly large declines in oil prices. JEL Classification: E31, Q41, Q43

Suggested Citation

  • Burian, Vlad & Stalla-Bourdillon, Arthur, 2026. "Non-linearities in oil prices: which conditions matter?," Economic Bulletin Boxes, European Central Bank, vol. 2.
    • Handle: RePEc:ecb:ecbbox:2026:0002:3
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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