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The global business cycle and speculative demand for crude oil

Author

Listed:
  • Elisabete Neves
  • Vítor Oliveira
  • Joana Leite
  • Carla Henriques

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.

Suggested Citation

  • Elisabete Neves & Vítor Oliveira & Joana Leite & Carla Henriques, 2021. "The global business cycle and speculative demand for crude oil," China Finance Review International, Emerald Group Publishing Limited, vol. 11(4), pages 502-521, September.
  • Handle: RePEc:eme:cfripp:cfri-05-2021-0091
    DOI: 10.1108/CFRI-05-2021-0091
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    Citations

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    Cited by:

    1. Zhang, Zhikai & Wang, Yudong & Xiao, Jihong & Zhang, Yaojie, 2023. "Not all geopolitical shocks are alike: Identifying price dynamics in the crude oil market under tensions," Resources Policy, Elsevier, vol. 80(C).
    2. Lu, Xinjie & Ma, Feng & Wang, Tianyang & Wen, Fenghua, 2023. "International stock market volatility: A data-rich environment based on oil shocks," Journal of Economic Behavior & Organization, Elsevier, vol. 214(C), pages 184-215.
    3. Qingxiang Han & Mengxi He & Yaojie Zhang & Muhammad Umar, 2023. "Default return spread: A powerful predictor of crude oil price returns," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 42(7), pages 1786-1804, November.
    4. Shi, Chunpei & Wei, Yu & Li, Xiafei & Liu, Yuntong, 2023. "Combination forecasts of China's oil futures returns based on multiple uncertainties and their connectedness with oil," Energy Economics, Elsevier, vol. 126(C).
    5. Yu, Zehui & Li, Yiming & Dai, Lihua, 2023. "Digital finance and regional economic resilience: Theoretical framework and empirical test," Finance Research Letters, Elsevier, vol. 55(PA).

    More about this item

    Keywords

    Demand; Supply; Speculation; Inventories; Spreads; Futures; Crude oil; Elasticity; Global markets; F44; G1;
    All these keywords.

    JEL classification:

    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • G1 - Financial Economics - - General Financial Markets

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