Storage scarcity and oil price uncertainty
Year: 2025
Type: article
Abstract: Recent research has shown how oil price uncertainty tends to switch endogenously between low and high volatility regimes, with high volatility regimes coinciding with declining prices (Cuñado and de Gracia 2003). This is at odds with the canonical storage model - the primary economic model of commodity price volatility. The model predicts lower volatility at lower prices. The purpose of this paper is to show how a reasonable specification of the U.S. oil market with increasing marginal storage cost and constrained storage capacity can explain the major volatility regimes in the market from 2007 to 2023. Volatility increases following negative demand shocks (or positive supply shocks) due to storage capacity becoming increasingly scarce, leading the market to price in higher uncertainty due to less flexible inventory response to supply/demand. • Oil price uncertainty switch endogenously between low and high volatility regimes. • Storage model with limited storage capacity can explain this regularity. • Counterfactual analysis shows how additional capacity reduces price volatility.
Source: Energy Economics
Authors: Atle Oglend, Tore Selland Kleppe
Institution: University of Stavanger
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $4,280
OpenAlex ID: W4408608351