Modelling the Global Price of Oil:Is there any Role for the Oil Futures-spot Spread?

Abstract

In this paper we develop a Structural Vector Autoregressive (SVAR) model of the global market for crude oil where the forward-looking expectations of oil traders are inferred from the financial markets. In this respect, we replace the global proxy for above-ground crude oil inventories with the oil futures-spot spread. The latter is defined as the percent deviation of the oil futures price from the spot price of oil and it represents a measure of the convenience yield but expressed with an opposite sign. The following model provides an economic interpretation of the residual structural shock, namely the financial market shock. This is designed to capture an unanticipated change in the benefit of holding crude oil inventories that is driven by financial incentives. We find evidence that financial market shocks have played an important role in explaining the surge of the real price of oil during the period 2003-2008.

Energy shocks in the Euro area: disentangling the pass-through from oil and gas prices to inflation

“…Panel 2 depicts the short run price demand elasticity for the oil market, and we notice that the mass of the posterior distribution is more concentrated to the left with respect to the prior. The prior is revised negatively, and the median is equal to -0.23%, again similarly to what is found in the gasoline and crude oil markets literature (see among others, Levin et al (2017), Baumeister and Hamilton (2019) and Valenti (2022)).…”