An analysis of the global oil market using SVARMA models

The paper analyses the importance of supply versus demand shocks on the global oil
market from 1974 to 2017, using a parsimonious structural vector autoregressive moving
average (SVARMA) model. The superior out-of-sample forecasting performance of the
reduced form VARMA compared to VAR alternatives advocates the suitability of this
framework. We specifically account for the changes in the oil market over three
distinctive sub-periods - pre moderation, great moderation and post moderation periods,
to provide a means of identifying the changing nature of shock transmission mechanism
across times. The findings shed some light on the effects of supply versus demand
related oil shocks under different economic environment. Oil supply shocks explain large
fraction of the movements in the global oil market in the pre and post moderation
periods, i.e. during the slower economic growth periods. The importance of global
activity shock on oil price movements is obvious during the 2003-2008 boom period. The
oil specific shock has an interesting transmission path on the global economic activity,
where the global activity responded positively and negatively during the global economic
expansion and contraction respectively, emphasising the precautionary nature of the
shock.