IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v144y2025ics0140988325002178.html
   My bibliography  Save this article

Storage scarcity and oil price uncertainty

Author

Listed:
  • Oglend, Atle
  • Kleppe, Tore Selland

Abstract

Recent research has shown how oil price uncertainty tends to switch endogenously between low and high volatility regimes, with high volatility regimes coinciding with declining prices (Cuñado and de Gracia 2003). This is at odds with the canonical storage model - the primary economic model of commodity price volatility. The model predicts lower volatility at lower prices. The purpose of this paper is to show how a reasonable specification of the U.S. oil market with increasing marginal storage cost and constrained storage capacity can explain the major volatility regimes in the market from 2007 to 2023. Volatility increases following negative demand shocks (or positive supply shocks) due to storage capacity becoming increasingly scarce, leading the market to price in higher uncertainty due to less flexible inventory response to supply/demand.

Suggested Citation

  • Oglend, Atle & Kleppe, Tore Selland, 2025. "Storage scarcity and oil price uncertainty," Energy Economics, Elsevier, vol. 144(C).
  • Handle: RePEc:eee:eneeco:v:144:y:2025:i:c:s0140988325002178
    DOI: 10.1016/j.eneco.2025.108393
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988325002178
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.eneco.2025.108393?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Yoosoon Chang & Ana María Herrera & Elena Pesavento, 2023. "Oil prices uncertainty, endogenous regime switching, and inflation anchoring," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(6), pages 820-839, September.
    2. Cunado, J. & Perez de Gracia, F., 2005. "Oil prices, economic activity and inflation: evidence for some Asian countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 45(1), pages 65-83, February.
    3. Kilian, Lutz, 2022. "Understanding the estimation of oil demand and oil supply elasticities," Energy Economics, Elsevier, vol. 107(C).
    4. Carlo Cafiero & Eugenio S.A. Bobenrieth H. & Juan R.A. Bobenrieth H. & Brian D. Wright, 2015. "Maximum Likelihood Estimation of the Standard Commodity Storage Model: Evidence from Sugar Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 97(1), pages 122-136.
    5. Oglend, Atle & Kleppe, Tore Selland, 2017. "On the behavior of commodity prices when speculative storage is bounded," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 52-69.
    6. John Elder & Apostolos Serletis, 2010. "Oil Price Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1137-1159, September.
    7. Bahattin Buyuksahin, Thomas K. Lee, James T. Moser, and Michel A. Robe, 2013. "Physical Markets, Paper Markets and the WTI-Brent Spread," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    8. Cunado, Juncal & Perez de Gracia, Fernando, 2003. "Do oil price shocks matter? Evidence for some European countries," Energy Economics, Elsevier, vol. 25(2), pages 137-154, March.
    9. Kang, Boda & Nikitopoulos, Christina Sklibosios & Prokopczuk, Marcel, 2020. "Economic determinants of oil futures volatility: A term structure perspective," Energy Economics, Elsevier, vol. 88(C).
    10. Tore S. Kleppe & Atle Oglend, 2019. "Can limits‐to‐arbitrage from bounded storage improve commodity term‐structure modeling?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(7), pages 865-889, July.
    11. Kyle Jurado & Sydney C. Ludvigson & Serena Ng, 2015. "Measuring Uncertainty," American Economic Review, American Economic Association, vol. 105(3), pages 1177-1216, March.
    12. Christophe Gouel & Nicolas Legrand, 2017. "Estimating the Competitive Storage Model with Trending Commodity Prices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(4), pages 744-763, June.
    13. Don Bredin & John Elder & Stilianos Fountas, 2010. "The Effects of Uncertainty about Oil Prices in G-7," Working Papers 200840, Geary Institute, University College Dublin.
    14. Leonid Kogan & Dmitry Livdan & Amir Yaron, 2009. "Oil Futures Prices in a Production Economy with Investment Constraints," Journal of Finance, American Finance Association, vol. 64(3), pages 1345-1375, June.
    15. John Stachurski, 2009. "Economic Dynamics: Theory and Computation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262012774, December.
    16. Kjartan Kloster Osmundsen & Tore Selland Kleppe & Roman Liesenfeld & Atle Oglend, 2021. "Estimating the Competitive Storage Model with Stochastic Trends in Commodity Prices," Econometrics, MDPI, vol. 9(4), pages 1-24, November.
    17. Dang, Tam Hoang-Nhat & Nguyen, Canh Phuc & Lee, Gabriel S. & Nguyen, Binh Quang & Le, Thuy Thu, 2023. "Measuring the energy-related uncertainty index," Energy Economics, Elsevier, vol. 124(C).
    18. Oglend, Atle, 2022. "The commodities/equities beta term-structure," Journal of Commodity Markets, Elsevier, vol. 28(C).
    19. van Eyden, Reneé & Difeto, Mamothoana & Gupta, Rangan & Wohar, Mark E., 2019. "Oil price volatility and economic growth: Evidence from advanced economies using more than a century’s data," Applied Energy, Elsevier, vol. 233, pages 612-621.
    20. Cafiero, Carlo & Bobenrieth H., Eugenio S.A. & Bobenrieth H., Juan R.A. & Wright, Brian D., 2011. "The empirical relevance of the competitive storage model," Journal of Econometrics, Elsevier, vol. 162(1), pages 44-54, May.
    21. Stachurski, John & Zhang, Junnan, 2021. "Dynamic programming with state-dependent discounting," Journal of Economic Theory, Elsevier, vol. 192(C).
    22. Michel A. Robe & Jonathan Wallen, 2016. "Fundamentals, Derivatives Market Information and Oil Price Volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(4), pages 317-344, April.
    23. Nikitopoulos, Christina Sklibosios & Squires, Matthew & Thorp, Susan & Yeung, Danny, 2017. "Determinants of the crude oil futures curve: Inventory, consumption and volatility," Journal of Banking & Finance, Elsevier, vol. 84(C), pages 53-67.
    24. Chatziantoniou, Ioannis & Filippidis, Michail & Filis, George & Gabauer, David, 2021. "A closer look into the global determinants of oil price volatility," Energy Economics, Elsevier, vol. 95(C).
    25. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
    26. Kleppe, Tore Selland & Oglend, Atle, 2017. "Estimating the competitive storage model: A simulated likelihood approach," Econometrics and Statistics, Elsevier, vol. 4(C), pages 39-56.
    27. Wang, Yudong & Guo, Zhuangyue, 2018. "The dynamic spillover between carbon and energy markets: New evidence," Energy, Elsevier, vol. 149(C), pages 24-33.
    28. Hui Guo & Kevin L. Kliesen, 2005. "Oil price volatility and U.S. macroeconomic activity," Review, Federal Reserve Bank of St. Louis, vol. 87(Nov), pages 669-684.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Guerra Vallejos, Ernesto & Bobenrieth Hochfarber, Eugenio & Bobenrieth Hochfarber, Juan & Wright, Brian D., 2021. "Solving dynamic stochastic models with multiple occasionally binding constraints," Economic Modelling, Elsevier, vol. 105(C).
    2. Oglend, Atle, 2022. "The commodities/equities beta term-structure," Journal of Commodity Markets, Elsevier, vol. 28(C).
    3. Christophe Gouel & Nicolas Legrand, 2025. "The role of storage in commodity markets: Indirect inference based on grain data," Quantitative Economics, Econometric Society, vol. 16(2), pages 705-747, May.
    4. Gouel, Christophe & Ma, Qingyin & Stachurski, John, 2024. "Interest rate dynamics and commodity prices," Journal of Economic Theory, Elsevier, vol. 222(C).
    5. Harrison, Andre & Liu, Xiaochun & Stewart, Shamar L., 2023. "Structural sources of oil market volatility and correlation dynamics," Energy Economics, Elsevier, vol. 121(C).
    6. V., Ernesto Guerra & H., Eugenio Bobenrieth & H., Juan Bobenrieth & Wright, Brian D., 2023. "Endogenous thresholds in energy prices: Modeling and empirical estimation," Energy Economics, Elsevier, vol. 121(C).
    7. Oglend, Atle & Kleppe, Tore Selland, 2017. "On the behavior of commodity prices when speculative storage is bounded," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 52-69.
    8. Atle Oglend & Vesa-Heikki Soini, 2020. "Equilibrium Working Curves with Heterogeneous Agents," Computational Economics, Springer;Society for Computational Economics, vol. 56(2), pages 355-372, August.
    9. Baris Kocaarslan & Ugur Soytas, 2025. "How do the reserve currency and uncertainties in major markets affect the uncertainty of oil prices over time?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 30(2), pages 2016-2041, April.
    10. Nikitopoulos, Christina Sklibosios & Thomas, Alice Carole & Wang, Jianxin, 2023. "The economic impact of daily volatility persistence on energy markets," Journal of Commodity Markets, Elsevier, vol. 30(C).
    11. Szczygielski, Jan Jakub & Charteris, Ailie & Obojska, Lidia & Brzeszczyński, Janusz, 2025. "Energy in turmoil: Industry resilience to uncertainty during the global energy crisis," Applied Energy, Elsevier, vol. 389(C).
    12. Nicolas Legrand, 2019. "The Empirical Merit Of Structural Explanations Of Commodity Price Volatility: Review And Perspectives," Journal of Economic Surveys, Wiley Blackwell, vol. 33(2), pages 639-664, April.
    13. Peipei, Wang & James, William, 2024. "Predicting oil price fluctuations: Integrating external indicators and advanced regression techniques," Resources Policy, Elsevier, vol. 97(C).
    14. Gupta, Rangan & Pierdzioch, Christian & Salisu, Afees A., 2022. "Oil-price uncertainty and the U.K. unemployment rate: A forecasting experiment with random forests using 150 years of data," Resources Policy, Elsevier, vol. 77(C).
    15. Asad Dossani & John Elder, 2024. "Uncertainty and investment: Evidence from domestic oil rigs," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(2), pages 323-340, February.
    16. Le, Thai-Ha & Boubaker, Sabri & Bui, Manh Tien & Park, Donghyun, 2023. "On the volatility of WTI crude oil prices: A time-varying approach with stochastic volatility," Energy Economics, Elsevier, vol. 117(C).
    17. Borozan, Djula & Lolic Cipcic, Marina, 2022. "Asymmetric and nonlinear oil price pass-through to economic growth in Croatia: Do oil-related policy shocks matter?," Resources Policy, Elsevier, vol. 76(C).
    18. Apostolakis, George N. & Floros, Christos & Gkillas, Konstantinos & Wohar, Mark, 2021. "Financial stress, economic policy uncertainty, and oil price uncertainty," Energy Economics, Elsevier, vol. 104(C).
    19. Fernandez-Perez, Adrian & Indriawan, Ivan & Tse, Yiuman & Xu, Yahua, 2023. "Cross-asset time-series momentum: Crude oil volatility and global stock markets," Journal of Banking & Finance, Elsevier, vol. 154(C).
    20. Śmiech, Sławomir & Papież, Monika & Rubaszek, Michał & Snarska, Małgorzata, 2021. "The role of oil price uncertainty shocks on oil-exporting countries," Energy Economics, Elsevier, vol. 93(C).

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:144:y:2025:i:c:s0140988325002178. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eneco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.