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Identifying oil supply news shocks and their effects on the global oil market

This paper uses a new empirical strategy to identify oil supply news shocks within a Non-Causal VAR model of standard global oil market variables. These shocks explain most of the movements in oil production over a long but finite time horizon. Our findings highlight the prominent role of expectations in propagating shocks. Negative oil supply news shocks cause abrupt and permanent reactions in global oil production, global economic activity and in oil inventory. However, an oil supply shock has only a limited effect on oil price. Finally, a news shock regarding oil supply shortfalls has macroeconomic consequences, causing a substantial decline in US industrial production.