IDEAS home Printed from https://ideas.repec.org/p/fem/femwpa/2022.11.html
   My bibliography  Save this paper

A weekly structural VAR model of the US crude oil market

Author

Listed:
  • Daniele Valenti

    (Fondazione Eni Enrico Mattei and Department of Environmental Science and Policy, University of Milan)

  • Andrea Bastianin

    (Department of Economics, Management and Quantitative Methods, University of Milan and Fondazione Eni Enrico Mattei)

  • Matteo Manera

    (Departments of Economics, Management and Statistics, University of Milan-Bicocca and Fondazione Eni Enrico Mattei)

Abstract

We present a weekly structural Vector Autoregressive (VAR) model of the US crude oil market. Exploiting weekly data we can explain short-run crude oil price dynamics, including those related with the COVID-19 pandemic and with the Russia’s invasion of Ukraine. The model is set identified with a Bayesian approach that allows to impose restrictions directly on structural parameters of interest, such as supply and demand elasticises. Our model incorporates both the futures-spot price spread to capture shocks to the real price of crude oil driven by changes in expectations and US inventories to describe price fluctuations due to unexpected of variations of above-ground stocks. Including the futures-spot price spread is key for accounting for feedback effects from the financial to the physical market for crude oil and for identifying a new structural shock that we label expectational shock. This shock plays a crucial role when describing the series of events that have led to the spike in the price of crude oil recorded in the aftermath of Russia’s invasion of Ukraine.

Suggested Citation

  • Daniele Valenti & Andrea Bastianin & Matteo Manera, 2022. "A weekly structural VAR model of the US crude oil market," Working Papers 2022.11, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2022.11
    as

    Download full text from publisher

    File URL: https://feem-media.s3.eu-central-1.amazonaws.com/wp-content/uploads/NDL2022-011.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ron Alquist and Olivier Gervais, 2013. "The Role of Financial Speculation in Driving the Price of Crude Oil," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    2. Ing-Haw Cheng & Wei Xiong, 2014. "Financialization of Commodity Markets," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 419-441, December.
    3. John Coglianese & Lucas W. Davis & Lutz Kilian & James H. Stock, 2017. "Anticipation, Tax Avoidance, and the Price Elasticity of Gasoline Demand," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(1), pages 1-15, January.
    4. Ron Alquist & Gregory Bauer & Antonio Diez de los Rios, 2014. "What Does the Convenience Yield Curve Tell Us about the Crude Oil Market?," Staff Working Papers 14-42, Bank of Canada.
    5. Ron Alquist & Lutz Kilian, 2010. "What do we learn from the price of crude oil futures?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 539-573.
    6. Knut Are Aastveit & Hilde C. Bj�rnland & Thomas S. Gundersen, 2021. "The Price Responsiveness of Shale Producers: Evidence From Micro Data," Working Papers No 05/2021, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    7. Laurence Levin & Matthew S. Lewis & Frank A. Wolak, 2017. "High Frequency Evidence on the Demand for Gasoline," American Economic Journal: Economic Policy, American Economic Association, vol. 9(3), pages 314-347, August.
    8. Ambrogio Cesa-Bianchi & M Hashem Pesaran & Alessandro Rebucci & Stijn Van Nieuwerburgh, 2020. "Uncertainty and Economic Activity: A Multicountry Perspective," The Review of Financial Studies, Society for Financial Studies, vol. 33(8), pages 3393-3445.
    9. Valenti, Daniele & Manera, Matteo & Sbuelz, Alessandro, 2020. "Interpreting the oil risk premium: Do oil price shocks matter?," Energy Economics, Elsevier, vol. 91(C).
    10. Kilian, Lutz & Zhou, Xiaoqing, 2022. "Oil prices, exchange rates and interest rates," Journal of International Money and Finance, Elsevier, vol. 126(C).
    11. Kilian, Lutz, 2022. "Understanding the estimation of oil demand and oil supply elasticities," Energy Economics, Elsevier, vol. 107(C).
    12. Michele Lenza & Giorgio E. Primiceri, 2022. "How to estimate a vector autoregression after March 2020," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(4), pages 688-699, June.
    13. Richard G. Newell and Brian C. Prest, 2019. "The Unconventional Oil Supply Boom: Aggregate Price Response from Microdata," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    14. Christiane Baumeister & Dimitris Korobilis & Thomas K. Lee, 2022. "Energy Markets and Global Economic Conditions," The Review of Economics and Statistics, MIT Press, vol. 104(4), pages 828-844, October.
    15. Christiane Baumeister & Lutz Kilian, 2016. "Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us," Journal of Economic Perspectives, American Economic Association, vol. 30(1), pages 139-160, Winter.
    16. Figuerola-Ferretti, Isabel & McCrorie, J. Roderick & Paraskevopoulos, Ioannis, 2020. "Mild explosivity in recent crude oil prices," Energy Economics, Elsevier, vol. 87(C).
    17. Andrea Carriero & Todd E. Clark & Massimiliano Marcellino & Elmar Mertens, 2021. "Addressing COVID-19 Outliers in BVARs with Stochastic Volatility," Working Papers 21-02R, Federal Reserve Bank of Cleveland, revised 09 Aug 2021.
    18. Chudik, Alexander & Mohaddes, Kamiar & Pesaran, M. Hashem & Raissi, Mehdi & Rebucci, Alessandro, 2021. "A counterfactual economic analysis of Covid-19 using a threshold augmented multi-country model," Journal of International Money and Finance, Elsevier, vol. 119(C).
    19. repec:zbw:bofrdp:2018_014 is not listed on IDEAS
    20. Alexander W. Bartik & Marianne Bertrand & Zoë B. Cullen & Edward L. Glaeser & Michael Luca & Christopher T. Stanton, 2020. "How Are Small Businesses Adjusting to COVID-19? Early Evidence from a Survey," NBER Working Papers 26989, National Bureau of Economic Research, Inc.
    21. Baumeister, Christiane & Hamilton, James D., 2020. "Drawing conclusions from structural vector autoregressions identified on the basis of sign restrictions," Journal of International Money and Finance, Elsevier, vol. 109(C).
    22. Christopher R. Knittel & Robert S. Pindyck, 2016. "The Simple Economics of Commodity Price Speculation," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(2), pages 85-110, April.
    23. Alessio Anzuini & Patrizio Pagano & Massimiliano Pisani, 2015. "Macroeconomic Effects of Precautionary Demand for Oil," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(6), pages 968-986, September.
    24. Baumeister, Christiane & Hamilton, James D., 2018. "Inference in structural vector autoregressions when the identifying assumptions are not fully believed: Re-evaluating the role of monetary policy in economic fluctuations," Journal of Monetary Economics, Elsevier, vol. 100(C), pages 48-65.
    25. Domenico Giannone & Lucrezia Reichlin, 2006. "Does information help recovering structural shocks from past observations?," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 455-465, 04-05.
    26. Aruoba, S. BoraÄŸan & Diebold, Francis X. & Scotti, Chiara, 2009. "Real-Time Measurement of Business Conditions," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 417-427.
    27. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    28. Eugene F. Fama & Kenneth R. French, 2015. "Commodity Futures Prices: Some Evidence on Forecast Power, Premiums, and the Theory of Storage," World Scientific Book Chapters, in: Anastasios G Malliaris & William T Ziemba (ed.), THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 4, pages 79-102, World Scientific Publishing Co. Pte. Ltd..
    29. Amir Alizadeh & Manolis Kavussanos & David Menachof, 2004. "Hedging against bunker price fluctuations using petroleum futures contracts: constant versus time-varying hedge ratios," Applied Economics, Taylor & Francis Journals, vol. 36(12), pages 1337-1353.
    30. Soren T. Anderson & Ryan Kellogg & Stephen W. Salant, 2018. "Hotelling under Pressure," Journal of Political Economy, University of Chicago Press, vol. 126(3), pages 984-1026.
    31. Baumeister, Christiane & Hamilton, James, 2018. "Inference in Structural Vector Autoregressions When the Identifying Assumptions are Not Fully Believed: Re-evaluating the Role," CEPR Discussion Papers 12911, C.E.P.R. Discussion Papers.
    32. Luciana Juvenal & Ivan Petrella, 2015. "Speculation in the Oil Market," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(4), pages 621-649, June.
    33. Christiane Baumeister & James D. Hamilton, 2019. "Structural Interpretation of Vector Autoregressions with Incomplete Identification: Revisiting the Role of Oil Supply and Demand Shocks," American Economic Review, American Economic Association, vol. 109(5), pages 1873-1910, May.
    34. Robert S. Pindyck, 1994. "Inventories and the Short-Run Dynamics of Commodity Prices," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 141-159, Spring.
    35. James L. Smith, 2009. "World Oil: Market or Mayhem?," Journal of Economic Perspectives, American Economic Association, vol. 23(3), pages 145-164, Summer.
    36. Christiane Baumeister & James D. Hamilton, 2015. "Sign Restrictions, Structural Vector Autoregressions, and Useful Prior Information," Econometrica, Econometric Society, vol. 83(5), pages 1963-1999, September.
    37. Gary B. Gorton & Fumio Hayashi & K. Geert Rouwenhorst, 2013. "The Fundamentals of Commodity Futures Returns," Review of Finance, European Finance Association, vol. 17(1), pages 35-105.
    38. Harold Hotelling, 1931. "The Economics of Exhaustible Resources," Journal of Political Economy, University of Chicago Press, vol. 39, pages 137-137.
    39. Caldara, Dario & Cavallo, Michele & Iacoviello, Matteo, 2019. "Oil price elasticities and oil price fluctuations," Journal of Monetary Economics, Elsevier, vol. 103(C), pages 1-20.
    40. Chun, Dohyun & Cho, Hoon & Kim, Jihun, 2019. "Crude oil price shocks and hedging performance: A comparison of volatility models," Energy Economics, Elsevier, vol. 81(C), pages 1132-1147.
    41. Serena Ng, 2021. "Modeling Macroeconomic Variations after Covid-19," NBER Working Papers 29060, National Bureau of Economic Research, Inc.
    42. James D. Hamilton, 2019. "Measuring Global Economic Activity," NBER Working Papers 25778, National Bureau of Economic Research, Inc.
    43. Kilian, Lutz & Zhou, Xiaoqing, 2018. "Modeling fluctuations in the global demand for commodities," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 54-78.
    44. Lutz Kilian & Daniel P. Murphy, 2014. "The Role Of Inventories And Speculative Trading In The Global Market For Crude Oil," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(3), pages 454-478, April.
    45. Hilde C. Bjørnland & Frode Martin Nordvik & Maximilian Rohrer, 2021. "Supply flexibility in the shale patch: Evidence from North Dakota," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 36(3), pages 273-292, April.
    46. Antolín-Díaz, Juan & Petrella, Ivan & Rubio-Ramírez, Juan F., 2021. "Structural scenario analysis with SVARs," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 798-815.
    47. Robert S. Pindyck, 2001. "The Dynamics of Commodity Spot and Futures Markets: A Primer," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-30.
    48. Hamilton, James D. & Wu, Jing Cynthia, 2014. "Risk premia in crude oil futures prices," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 9-37.
    49. Primiceri, Giorgio & Lenza, Michele, 2020. "How to Estimate a VAR after March 2020," CEPR Discussion Papers 15245, C.E.P.R. Discussion Papers.
    50. Sophie van Huellen, 2020. "Approaches To Price Formation In Financialized Commodity Markets," Journal of Economic Surveys, Wiley Blackwell, vol. 34(1), pages 219-237, February.
    51. Christiane Baumeister & Lutz Kilian, 2014. "Real-Time Analysis of Oil Price Risks Using Forecast Scenarios," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(1), pages 119-145, April.
    52. James D. Hamilton, 2013. "Oil prices, exhaustible resources and economic growth," Chapters, in: Roger Fouquet (ed.), Handbook on Energy and Climate Change, chapter 1, pages 29-63, Edward Elgar Publishing.
    53. Venditti, Fabrizio & Veronese, Giovanni, 2020. "Global financial markets and oil price shocks in real time," Working Paper Series 2472, European Central Bank.
    54. Michael Sockin & Wei Xiong, 2015. "Informational Frictions and Commodity Markets," Journal of Finance, American Finance Association, vol. 70(5), pages 2063-2098, October.
    55. Ge, S. & Li, S. & Linton, O., 2020. "A Dynamic Network of Arbitrage Characteristics," Cambridge Working Papers in Economics 2060, Faculty of Economics, University of Cambridge.
    56. Frankel, Jeffrey A., 2014. "Effects of speculation and interest rates in a “carry trade” model of commodity prices," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 88-112.
    57. Daniel J. Lewis & Karel Mertens & James H. Stock & Mihir Trivedi, 2022. "Measuring real activity using a weekly economic index," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(4), pages 667-687, June.
    58. Martin Bodenstein & Luca Guerrieri & Lutz Kilian, 2012. "Monetary Policy Responses to Oil Price Fluctuations," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(4), pages 470-504, December.
    59. Kristoufek, Ladislav, 2019. "Are the crude oil markets really becoming more efficient over time? Some new evidence," Energy Economics, Elsevier, vol. 82(C), pages 253-263.
    60. Rebelo, Sérgio & Krusell, Per & Bornstein, Gideon, 2017. "Lags, Costs and Shocks: An Equilibrium Model of the Oil Industry," CEPR Discussion Papers 12047, C.E.P.R. Discussion Papers.
    61. Matvos, Gregor & Seru, Amit & Silva, Rui C., 2018. "Financial market frictions and diversification," Journal of Financial Economics, Elsevier, vol. 127(1), pages 21-50.
    62. 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.
    63. Kenneth J. Singleton, 2014. "Investor Flows and the 2008 Boom/Bust in Oil Prices," Management Science, INFORMS, vol. 60(2), pages 300-318, February.
    64. Lee, Chien-Chiang & Zeng, Jhih-Hong, 2011. "Revisiting the relationship between spot and futures oil prices: Evidence from quantile cointegrating regression," Energy Economics, Elsevier, vol. 33(5), pages 924-935, September.
    65. Sharif, Arshian & Aloui, Chaker & Yarovaya, Larisa, 2020. "COVID-19 pandemic, oil prices, stock market, geopolitical risk and policy uncertainty nexus in the US economy: Fresh evidence from the wavelet-based approach," International Review of Financial Analysis, Elsevier, vol. 70(C).
    66. Zia Wadud & Daniel J. Graham & Robert B. Noland, 2010. "Gasoline Demand with Heterogeneity in Household Responses," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 47-74.
    67. Elder, John & Miao, Hong & Ramchander, Sanjay, 2014. "Price discovery in crude oil futures," Energy Economics, Elsevier, vol. 46(S1), pages 18-27.
    68. Hilde C. Bj�rnland, 2019. "Supply flexibility in the shale patch: Facts, no fiction," Working Papers No 08/2019, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    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. Valenti, Daniele & Manera, Matteo & Sbuelz, Alessandro, 2020. "Interpreting the oil risk premium: Do oil price shocks matter?," Energy Economics, Elsevier, vol. 91(C).
    2. Lang, Korbinian & Auer, Benjamin R., 2020. "The economic and financial properties of crude oil: A review," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    3. Kilian, Lutz, 2022. "Facts and fiction in oil market modeling," Energy Economics, Elsevier, vol. 110(C).
    4. Sung Je Byun, 2017. "Speculation in Commodity Futures Markets, Inventories and the Price of Crude Oil," The Energy Journal, International Association for Energy Economics, vol. 0(Number 5).
    5. Daniele Valenti, 2018. "Modelling the Global Price of Oil: Is there any Role for the Oil Futures-spot Spread?," Working Papers 2018.06, Fondazione Eni Enrico Mattei.
    6. Kilian, Lutz, 2022. "Understanding the estimation of oil demand and oil supply elasticities," Energy Economics, Elsevier, vol. 107(C).
    7. Jin, Xin, 2019. "The role of market expectations in commodity price dynamics: Evidence from oil data," Journal of International Money and Finance, Elsevier, vol. 90(C), pages 1-18.
    8. Nooman Rebei & Rashid Sbia, 2021. "Transitory and permanent shocks in the global market for crude oil," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 36(7), pages 1047-1064, November.
    9. Ing-Haw Cheng & Wei Xiong, 2014. "Financialization of Commodity Markets," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 419-441, December.
    10. Efthymios G. Pavlidis & Ivan Paya & David A. Peel, 2018. "Using Market Expectations to Test for Speculative Bubbles in the Crude Oil Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(5), pages 833-856, August.
    11. Lomonosov, Daniil & Polbin, Andrey & Fokin, Nikita, 2020. "Влияние Шоков Мировой Деловой Активности, Предложения Нефти И Спекулятивных Нефтяных Шоков На Экономику Рф [The impact of global economic activity, oil supply and speculative oil shocks on the Russ," MPRA Paper 106019, University Library of Munich, Germany.
    12. Gong, Xiao-Li & Liu, Jian-Min & Xiong, Xiong & Zhang, Wei, 2021. "The dynamic effects of international oil price shocks on economic fluctuation," Resources Policy, Elsevier, vol. 74(C).
    13. Hilde C. Bjørnland & Frode Martin Nordvik & Maximilian Rohrer, 2021. "Supply flexibility in the shale patch: Evidence from North Dakota," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 36(3), pages 273-292, April.
    14. Knut Are Aastveit & Hilde C. Bj�rnland & Thomas S. Gundersen, 2021. "The Price Responsiveness of Shale Producers: Evidence From Micro Data," Working Papers No 05/2021, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    15. Daniil Lomonosov & Andrey Polbin & Nikita Fokin, 2021. "The Impact of Global Economic Activity, Oil Supply and Speculative Oil Shocks on the Russian Economy," HSE Economic Journal, National Research University Higher School of Economics, vol. 25(2), pages 227-262.
    16. Hilde C. Bjørnland, 2022. "The effect of rising energy prices amid geopolitical developments and supply disruptions," Working Papers No 07/2022, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    17. Doga Bilgin & Reinhard Ellwanger, 2019. "The Simple Economics of Global Fuel Consumption," Staff Working Papers 19-35, Bank of Canada.
    18. Gambetti, Luca & Moretti, Laura, 2017. "News, Noise and Oil Price Swings," Research Technical Papers 12/RT/17, Central Bank of Ireland.
    19. Olivier Rousse & Benoît Sévi, 2017. "Informed Trading in Oil-Futures Market," Working Papers hal-01460186, HAL.
    20. Kilian, Lutz & Zhou, Xiaoqing, 2022. "Oil prices, exchange rates and interest rates," Journal of International Money and Finance, Elsevier, vol. 126(C).

    More about this item

    Keywords

    COVID-19; WTI price; futures-spot price spread; speculation; structural VAR; Bayesian VAR;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:fem:femwpa:2022.11. 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: Alberto Prina Cerai (email available below). General contact details of provider: https://edirc.repec.org/data/feemmit.html .

    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.