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

Abstract

Several studies have emphasised 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 into 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 stabilising influence on the oil market. We consider broader policy implications for our results.