Oil price dynamics, macro-finance interactions and the role of financial speculation

What is the role of financial speculation in determining the real oil price? We find that while macroeconomic shocks have been the main real oil price upward driver since mid-1980s, financial shocks have sizably contributed since early 2000s as well, and at a much larger extent since mid-2000s. Even though financial shocks contribute 44% out of the 65% real oil price increase over the period 2004-2010, the third oil price shock is a macro-finance episode: macroeconomic shocks actually largely account for the 2007-2008 oil price swing. While we then find support to the demand side view of real oil price determination, we however also find a much larger role for financial shocks than previously noted in the literature.

► We assess the contribution of financial speculation to real oil price determination. ► We find that macroeconomic shocks are the main oil price driver since mid-1980s. ► Financial shocks also matter since mid-2000s, more than previously noted. ► This is consistent with the progressive financialization of the oil futures market. ► The third oil price shock is however a macro-finance episode.