Identifying Oil Supply News Shocks and Their Effects on the Global Oil Market

Abstract

This paper uses a Max-Share approach to identify oil supply news shocks within a noncausal VAR model of standard global oil market variables. News shocks are identified in a way that explain most of the movements in real oil price driven by global oil production over a long but finite time horizon. Our findings highlight the prominent role of expectations in propagating oil supply shocks. Negative oil supply news shocks cause a gradual and persistent decline in global oil production and global economic activity and a strong and immediate increase in the most forward-looking variables, namely real oil price and global oil stocks. Finally, news about future oil supply shortfalls has substantial consequences in macroeconomic variables leading to disruptions in both real and financial sectors.

Keywords: Oil supply news shocks, Global oil market, Max-Share methodology, Non-fundamentalness, Structural Non-causal VAR

JEL Classification: C32, D84, E32, Q41, Q43