This paper proposes a method to decompose daily oil prices variations into demand (expected or current) and supply shocks by exploiting the information contained in the stock prices for a large number of countries and in a measure of US equity implied volatility. The method provides a real-time interpretation of oil price movements, which is particularly useful in periods of high volatility because it circumvents the problem of publication lags of macroeconomic data.
The volatility of oil supply shocks increases on the days of OPEC's announcements on future production, while the volatility of current and expected demand shocks rises when macroeconomic data are released and on days of the Federal Reserve's monetary policy announcements.
