What drives most jumps in global crude oil prices? Fundamental shortage conditions, Cartel, geopolitics or the behavior of market financial participants

Refk Selmi, Shawkat Hammoudeh and Mark Wohar ()
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Shawkat Hammoudeh: Drexel University
Mark Wohar: University of Nebraska Omaha - University of Nebraska System

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Abstract: Several studies have emphasized the potential role of oil price volatility as a leading macroeconomic indicator, since it provides prominent information to energy traders, market participants and policymakers. In an effort to shed fresh insights on the underlying factors of wide oil price changes, the objective of this paper is twofold. First to capture large oil price changes caused by the arrival of surprising news (i.e., jumps); second to distinguish between short-, medium-and long-term determinants of jumps in oil prices due to changes in oil supply and demand fundamentals, factors associated with the market power of oil producers, speculation, geopolitical risks and OPEC's spare capacity. Using an Empirical Mode Decomposition (EMD), we find that oil supply and demand forces are the most prevalent in determining oil price changes in the long run, which is quite predictable. OPEC gains increasing importance in the medium-and long-terms. Our method also allows us to show that OPEC's use of spare capacity moderately reduces oil price volatility in the short-term, thus suggesting a limited stabilizing influence on the oil market. We consider broader policy implications for our results.

Keywords: Oil price jumps; oil price determinants; Empirical Mode Decomposition; Empirical Mode Decomposition JEL classification: G15; C11; C58; Q30; Q31 (search for similar items in EconPapers)
Date: 2022-08-01
New Economics Papers: this item is included in nep-com, nep-ene and nep-rmg
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Published in The World Economy, 2022

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