Peaks, Spikes, and Barrels: Modeling Sharp Movements in Oil Prices

IMF Working Papers, August 1, 2010

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Canonical URL: Peaks, Spikes, and Barrels: Modeling Sharp Movements in Oil Prices

Authors: Malika Pant, Martin Mühleisen, Alun H. Thomas
Date: August 1, 2010
Core question: Were the 2008 sharp oil price swings driven primarily by fundamentals (inelastic supply and demand) or by financial investor activity/speculation?
Executive summary: The paper uses a simultaneous equation model to separately analyze supply and demand factors. The model broadly captures both the 2008 surge and subsequent fall in oil prices, finding a particularly strong impact of demand factors and a strong effect of a measure for global liquidity, but no support for a speculative motive.

Model type: Simultaneous equation model enabling separate analysis of supply and demand factors.
Empirical focus: Capturing the surge and subsequent fall in oil prices around 2008 and assessing competing hypotheses (fundamentals vs. financial investor/speculative motives).
Key variables highlighted in the summary: demand factors, measure for global liquidity, speculative motive (tested but not supported).

The model broadly captures both the surge and subsequent fall in oil prices in 2008.
Demand factors have a particularly strong impact on price movements.
A measure for global liquidity has a strong effect on oil prices.
The analysis does not find support for a speculative motive as the driver of the 2008 price movements.

Emphasis on demand-side drivers and global liquidity suggests monitoring consumption demand and international liquidity conditions is important for understanding sharp oil price movements.
Lack of support for a speculative motive indicates policy responses focused on financial-market speculation in commodities may not address the primary drivers identified in this study.

Subjects: Asset and liability management, Commodities, Consumption, Emerging and frontier financial markets, Financial markets, International liquidity, National accounts, Oil, Oil prices, Prices
Keywords: asset demand, commodity, commodity price inflation, Consumption, consumption demand, Emerging and frontier financial markets, equity price, Global, International liquidity, OECD consumption, Oil, oil price, Oil prices, Opec, OPEC supply quota, price, price surge, speculation, supply, supply margin term, WP

Peaks, Spikes, and Barrels: Modeling Sharp Movements in Oil Prices — IMF Working Paper No. 2010/186 (August 1, 2010).

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