Do oil prices respond to real interest rates?

We show that the robustness of an inverse relationship between the real interest rate and real oil price depends crucially on how the real interest rate is calculated, and the time-frame of the sample. Consistent with earlier studies, we find that the oil price falls with an unexpected rise in either U.S. or international ex-ante real interest rates. When the ex-post real interest rate is used, the oil price only falls with rises to short-term rates (3 months or less). Additionally, the response of the oil price to long-term ex-ante real interest rates must include the period through the mid-2000s for the inverse relationship to appear. In contrast, the oil price consistently falls with unexpected rises in short-term real interest rates throughout the entire sample. We draw two conclusions from the results. The first is that the oil price is consistently responsive to short-term U.S. and international real interest rates, underlying the importance of storage. Second, oil prices have become more responsive to long-term real interest rates over time.

► Real oil price responses to changes in real interest rates depend on how the rate is calculated. ► Real oil price responses to changes in real interest rates depend on the time period. ► A rise in short-term real interest rates leads to a significant fall in the real price of oil. ► Long-term real interest rates lead to a fall if rates are ex-ante and the sample includes mid-2000's.