Our findings suggest that the impact response of the oil price to speculative demand shocks driven by temporary motives in explaining the short-run real oil price volatility lie between 10 to 35%—second to those of flow demand (between 40 to 45%) but conceivably larger than those of flow supply (at 20%).
This means that news on temporary supply expansions or movements in risk premiums or perhaps financial speculation have played a non-negligible role in moving oil prices in the short run. We also find that it matters what type of speculative demand is identified when looking at the evolution of the respective drivers of oil prices over time as well as during the last eleven months of this year. When speculative demand is confined to be short in duration (Figure 2, left, our MFEV), the main contributor to oil price variation over our sample is flow oil demand shocks, followed by flow supply shocks, and finally financial speculation shocks—the latter having played a minor role. However, when we allow speculative demand shocks to have larger effects in the short and long run (Figure 2, right, our Max Ratio), thus reflecting changes in expectations about future oil market conditions, then speculation shocks were the main contributor, with flow demand now in second place and supply playing a minor role.