Interpreting the effect of global economic risks on crude oil market: A supply-demand perspective

Fluctuations in crude oil prices are widely considered to reflect changes in global economic conditions. However, recent extreme events such as the COVID-19 outbreak and the Russia-Ukraine conflict have severely weakened global economic conditions, which awakens our renewed attention to the crude oil market. Can crude oil price fluctuations still reflect global economic conditions? Different from previous studies, we aim to interpret this question by focusing on the supply-demand shocks and investigating the influencing mechanism from a dynamic perspective. First, we simply count the number and location of months when supply-demand shocks and eco-nomic conditions simultaneously changed. Results show that the response of supply-demand shocks to economic conditions may change over time. Second, the time-varying detection shows that the significant impacts of economic conditions on different shocks exist in different periods. Finally, tests based on spectral density suggest that economic conditions only have medium-term effects on supply shocks but can strongly affect demand shocks associated with economic activity in any case. Besides, we fail to provide evidence of the impact of economic conditions on the other two demand shocks. Thus, not all shocks in crude oil prices can reflect changes in global economic conditions.