The global business cycle and speculative demand for crude oil
China Finance Review International
ISSN: 2044-1398
Article publication date: 3 September 2021
Issue publication date: 20 October 2021
Abstract
Purpose
This paper aims to better understand if speculative activity is a factor or even the main factor in the run-up of oil prices in the spot market, particularly in the recent price bubble that occurred in the period from mid-2003 to 2008.
Design/methodology/approach
The methodology used is based on an existing vector autoregressive model proposed by Kilian and Murphy (2014), which is a structural model of the global market for crude oil that accounts for flow demand and flow supply shocks and speculative demand oil shocks.
Findings
From the output of the authors’ structural model, the authors ruled out speculation as a factor of rising oil prices. The authors have found instead that the rapid oil demand caused by an unexpected increase in the global business cycle is the most accurate culprit. Despite the change of perspective in the speculative component, the authors’ conclusions concur with the findings of Kilian and Murphy (2014) and others.
Originality/value
As far as the authors are aware, this is the first time that a study has used as a spread oil variable, a speculative component of the real price, replacing the oil inventories considered by Kilian and Murphy (2014). Another contribution is that the model used allows estimating traditional oil demand elasticity in production and oil supply elasticity in spread movements, casting doubt on existing models with perfect price-inelastic output for crude oil.
Keywords
Acknowledgements
This work is supported by: European Structural and Investment Funds in the FEDER component, through the Operational Competitiveness and Internationalization Programme (COMPETE 2020) [Project No. 006971 (UID/SOC/04011); Funding Reference: POCI-01-0145-FEDER-006971]; and the Portuguese Foundation for Science and Technology through Projects UID/MULTI/00308/2020 and UIDB/05037/2020 and the European Regional Development Fund in the framework of COMPETE 2020 Programme within project T4ENERTEC (POCI-01-0145-FEDER-0298) and National funds, through the FCT - Portuguese Foundation for Science and Technology under the project UIDB/04011/2020.
Citation
Neves, E., Oliveira, V., Leite, J. and Henriques, C. (2021), "The global business cycle and speculative demand for crude oil", China Finance Review International, Vol. 11 No. 4, pp. 502-521. https://doi.org/10.1108/CFRI-05-2021-0091
Publisher
:Emerald Publishing Limited
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