Unravelling Oil Market Volatility: The Dual Impact of Crises

Abstract

The current coronavirus pandemic (COVID-19) has harmed the economy in general and the oil industry in particular in at least two ways. In the beginning, COVID-19 produced a demand shock by reducing the demand for crude oil globally, increasing levels of uncertainty, and starting a global economic crisis. The world's two major oil producers, Saudi Arabia and Russia, engaged in a trade war as a result of the outbreak, which also resulted in a supply shock. These shocks caused a great deal of volatility on the oil market. We look at the reasons for this volatility in this article, as well as how variations in oil demand and supply impact the price of West Texas Intermediate (WTI) crude oil. As a consequence, we show that the oil shocks caused by the pandemic had a considerable impact on the volatility of oil prices. In particular, we track the impact of these shocks and investor apprehension on oil price volatility. We show that greater levels of uncertainty cause larger fluctuations in oil prices. Our findings did not change when the stability of our models was taken into consideration.