Working Paper Series,
Norwegian University of Life Sciences, School of Economics and Business

Abstract: This paper studies the importance of demand and supply shocks in the oil market, and tries to explain the formation of the short-run oil price by applying an extended commodity storage model to the cyclical components of the price. First, I employ a multivariate method to extract the cyclical component of the oil price, world oil consumption, and global GDP. Next, I find a large and positive effect of global GDP shock on the oil price cycles in a VAR model. Then, I estimate the commodity storage model using a moment-matching method. All parameters are estimated significantly, and the model shows good capability of reproducing the volatility and persistence of oil pricecycles. IfindthattheGDPshockgeneratesamuchmoremoderateeffectontheoil price cycles in the extended commodity storage model than the empirical evidence from the VAR analysis, and the production shock plays an important role for the variance of the cyclical component of the oil price.

Keywords: Oilprice; demandshock; supplyshock; competitivestorage model; BeverageNelson decomposition; simulated method of moments

JEL-codes: C15; G10; O13; Q40

38 pages, September 17, 2018

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