Journal of Energy Markets

The impact of unconventional monetary policy shocks on the crude oil futures market

Tarek Chebbi

  • In a shorter window, announcements about Fed’s purchases led investors to downgrade their U.S. growth forecasts, and consequently decreasing, on average,  long-term U.S. bond yields, and triggering a decline in oil prices and an increase in volatility.
  • In contrast, when I opted to work on one day after the announcement, the monetary surprises led to significant increases in oil prices.
  • The magnitude of the oil market response depends crucially on the size of the study window through which monetary policy may affect prices. 

This paper examines how West Texas Intermediate (WTI) crude oil price returns and volatilities respond to changes in US monetary policy. To do so, it considers daily data collected between 2008 and 2014. It measures the monetary policy shocks as the change in US ten-year government bond yields immediately after the announcement of relevant events. The findings reveal the crude oil market to be highly reactive to unconventional monetary policy surprises. Surprisingly, when working with shorter windows – that is, of one day right around the announcement of a large-scale asset purchase likely to cause a decrease in long-term interest rates – one documents, in general, a decline in oil price returns and an increase in their associated volatilities, despite the more stimulative financial environment. In contrast, the effects of monetary policy on the oil market one day after any significant announcement are different. As a rule, monetary surprises led to significant increases in oil price. In particular, this paper highlights the ways in which the magnitude of the oil market’s response may be influenced by the size of the study window (that is, the period in which monetary policy may affect prices). This observation raises the question of whether transmission channels drive the relationship between monetary policy and the crude oil market. This paper makes an important contribution to the empirical literature dealing with the link between monetary policy and energy markets: namely, the crude oil futures market and the existing literature focusing on the transmission mechanism. The empirical results entail important implications for industry participants and policy makers alike.

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