Paolo Agnolucci

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                    [post_date] => 2017-12-07 09:50:22
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                    [post_content] => Using novel measures that decompose oil supply shocks into its exogenous supply (driven by exogenous geopolitical events in OPEC countries) and endogenous supply (driven by investment dynamics within the oil sector) components, this paper offers a fresh perspective on the role of supply, flow demand and speculative demand shocks in explaining the changes in the real price of oil over the last three decades. We show that while exogenous supply shocks are non-negligible, endogenous supply shocks have generated larger and more persistent price responses than previously thought. Earlier studies have consistently shown that positive shifts in the flow demand for oil were responsible for most of the oil price surge between 2002-2008. But this paper shows that endogenous production capacity constraints, which restricted the ability of producers to ramp up production to meet the unexpected increase in demand, added at least $50/barrel to the real price of oil during that period. More recently, endogenous oil supply shocks alone accounted roughly for twice as much as any other supply or demand shock in explaining the 2014 oil price collapse. Specifically, of the $64 per barrel cumulative decline in the real price of oil from June 2014 to January 2015, our model estimates that $29 have been due to endogenous oil supply shocks, $13 have been due to exogenous oil supply shocks, and $12 have been due to flow demand shocks. The paper concludes by demonstrating that forecasting models that are able to distinguish between exogenous and endogenous supply shocks generate more realistic out-of-sample estimates of the sequences of the structural shocks, thus resulting in higher real-time predictive accuracy than forecasting models that use a collective measure of a flow supply shock.

Full paper
                    [post_title] => A Structural Model of the World Oil Market: The Role of Investment Dynamics and Capacity Constraints in Explaining the Evolution of the Real Price of Oil
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This paper explores how the oil price path could evolve in 2017 by assessing the various oil price risks under alternative forecast scenarios pertaining to future market conditions. It is shown that even without the OPEC-non-OPEC output cut agreement in November 2016, the three-year long price fall would eventually have come to a halt and stabilized at close to $41/b in 2017 based solely on market forces. The agreement, however, helped accelerate the price recovery by stabilising the oil price near $50/b. That said, the current price at above $50/b already incorporates the bulk of the expected gains from the full enforcement of the production cuts and reflects the positive shift of market sentiment that has been building-up in anticipation of the implementation of the output cut agreement. Thus, for the next year, the oil price path is more sensitive to downside risks depending on the discipline of OPEC and non-OPEC oil producers. In fact, for the price recovery to be sustained in 2017, OPEC efforts must be met by favourable market conditions in the form of an unexpected surge in global oil demand amid a moderate expansion of US shale supply. On the contrary, a deterioration of global economic activity, or an aggressive expansion of US shale supply, or both, could reverse the current momentum. Moreover, a return of oil production from conflict inflicted countries Libya and Nigeria could undermine the OPEC agreement from within. Eventually, whatever scenario plays out, OPEC will continue to assess the market conditions and in the second half of 2017, it can decide on whether to extend the agreement to offset any losses to the anticipated oil price recovery that may arise from changes in oil market conditions or to drop the agreement all together. But regardless which way the decision goes, the latest output cut agreement is critical to resolving fundamental uncertainties about the shock hitting the oil market and OPEC behaviour in a more uncertain world.

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