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Speculation in the oil market

  • Luciana Juvenal
  • Ivan Petrella

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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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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  1. Luciana Juvenal & Ivan Petrella, 2012. "Speculation in the oil market," Economic Synopses, Federal Reserve Bank of St. Louis.
  2. Hamilton, James D & Herrera, Ana Maria, 2004. "Oil Shocks and Aggregate Macroeconomic Behavior: The Role of Monetary Policy: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 265-86, April.
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  9. International Monetary Fund, 2007. "Oil Shocks and External Balances," IMF Working Papers 07/110, International Monetary Fund.
  10. Brett W. Fawley & Luciana Juvenal & Ivan Petrella, 2012. "When oil prices jump, is speculation to blame?," The Regional Economist, Federal Reserve Bank of St. Louis, issue Apr.
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  22. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
  23. Paul Davidson & Laurence H. Falk & Hoesung Lee, 1974. "Oil: Its Time Allocation and Project Independence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 5(2), pages 411-448.
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  25. In Choi & Jorg Breitung, 2011. "Factor models," Working Papers 1121, Research Institute for Market Economy, Sogang University, revised Dec 2011.
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  27. Catherine Doz & Lucrezia Reichlin, 2011. "A two-step estimator for large approximate dynamic factor models based on Kalman filtering," Post-Print peer-00844811, HAL.
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