Oil Prices: Geopolitical Tensions and Supply Events

Abstract

The impact on oil prices of geopolitical tensions and oil supply-side events is examined. Using a GARCH model on daily oil price data, we find that, when these events actually occur -10% frequency- the geopolitical events explain around 34 of daily oil returns forecasted by the model, and oil supply-side events explain 23. When there is no occurrence of these events, financial factors (i.e. dollar fluctuations and market risk perception changes) explain around 45 of the daily return of oil price forecasted in average. Variance of oil return is highly persistent and these events explain no more than 10% of the daily conditional variance on the day the events actually occur.

Publication
Working Paper 680, 2012, Central Bank of Chile