System analysis approach for the identification of factors driving crude oil prices

A system analysis approach is proposed to identify the main factors driving international crude oil prices by integrating a partial least squares model, an vector error correction model and the directed acyclic graph method. The different mechanisms driving international crude oil prices during the oil price falling and rising periods are analyzed in three aspects: contemporaneous information transmission mechanism, explanatory power of factors for oil price trend and their contributions to the oil price volatility. The results show that the original mechanism of crude oil markets is destroyed by the 2008 financial crisis and the contemporaneous causality between oil price and various factors are significantly strengthened after crisis. Before the crisis, speculation was the main factor boosting oil price volatility in the contemporaneous and short run, while fundamental factors played important roles in the long run. After the crisis, spillover effect among different markets exhibits more obvious. Stock market, exchange rate market and commodity market make greater contribution, while US dollar index is the main factor affecting oil price volatility in the short and long run.

► A systems analysis approach is proposed to analyze the factors that affect oil price trend and volatility.
► The contemporaneous causal structure is reconstructed to analyze the information transmission mechanism.
► Empirical research is made on the driving factors affecting oil price to get some important conclusions.