LAUSR

This paper empirically investigates the relationship between oil prices, traditional fundamentals and expectations. Informational frictions may force a wedge between oil prices and supply and/or demand shocks, especially during periods of elevated risk aversion and uncertainty. In such a context, expectations can be a key driver of oil price movements and their impact can vary over time. Overall, we find that both traditional oil fundamentals and forward-looking expectations matter for oil prices. Our findings show that the real price of oil responds differently to expectations shocks of business leaders, consumers and aggregate markets. Our TVP-VAR approach provides evidence that business leaders' expectations play an important role in terms of oil price fluctuations and the impact is stronger in periods of elevated global oil demand. In terms of traditional oil market fundamentals, we find that oil prices have been significantly affected by the recent US shale oil boom. Moreover, global oil demand had a positive impact upon oil prices, especially from the mid-2000s. Several alternative model specifications prove the robustness of our analysis.