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Tight oil, real WTI prices and U.S. stock returns

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  • Huang, Wanling
  • Mollick, Andre Varella

Abstract

Following the adoption of new techniques of shale and fracking by U.S. oil companies, a structural vector autoregression model (SVAR) complements studies on why Brent and WTI started to diverge around early-2011. Using monthly data from 2000 to 2018, we decompose oil supply into: world oil (excluding U.S.), U.S. conventional (non-tight) oil and U.S. tight oil. We examine the variance decomposition of stock returns for the aggregate market (S&P 500), the S&P Energy sector and Chevron and Exxon Mobil oil companies, and we further identify differences between two subsamples from 2000 to 2010 and 2011 to 2018, respectively. We find that supply considerations (especially due to tight oil) become more important in the subsample after 2011, not only for individual oil companies but also for the aggregate market and energy sector: Supply shocks due to tight oil explain in our benchmark model between 29% (S&P 500) and 31% (S&P Energy) of the variance in stock returns after 24 months and between 28% and 29% for oil companies. None of these are statistically significant in the pre-2011 subsample. Among impulse responses, tight oil production responds positively to disruptions in world oil, and U.S. stock returns respond positively to oil price shocks and respond negatively to tight oil shocks which is a further finding while being consistent with the literature. Copula modeling uncovers stronger tail dependences in the second subsample for the interactions during downturns and upturns among global demand, crude oil prices and stock markets.

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  • Huang, Wanling & Mollick, Andre Varella, 2020. "Tight oil, real WTI prices and U.S. stock returns," Energy Economics, Elsevier, vol. 85(C).
    • Handle: RePEc:eee:eneeco:v:85:y:2020:i:c:s014098831930369x
    DOI: 10.1016/j.eneco.2019.104574
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    More about this item

    Keywords

    Brent oil prices; Conventional oil; Stock returns; Tight oil; WTI oil prices;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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