Crude oil inventories: The two faces of Janus?

Abstract

In this article, we examine whether oil inventories react to oil demand and supply shocks as a buffer to the market, as a facilitation of speculative trading, or both. Unlike previous studies that discuss the role of inventories from the perspective of the relationship between inventory and price, this study derives speculative and buffer roles from the endogenous responses of inventory to demand and supply shocks. Global, US, and Cushing, Oklahoma inventories from January 2003 to June 2008 and January 2009 to May 2018 are compared from the aggregate to sub-aggregate levels. A sign-restricted structural vector autoregressive model is employed, and robustness verifications are added. Overall, while supply and demand shocks shift oil production and consumption, the buffer responses of inventories are found to be immediate for demand shocks but gradual for supply shocks, and the instantaneous speculative responses of the Cushing inventories are revealed.