Oil market responses to Sino–European political relation shock: Insights after China's world trade organization accession

We investigate how changes in political relations between Europe and China affect the oil market. When political relations improve, we find a significant increase in oil demand and prices, accompanied by a decrease in market uncertainty. However, the effects on oil supply and inventory are minimal. Additionally, we compute the forecast error variance decomposition and construct the counterfactual evolution of oil variables in the absence of the impacts of political relation shocks. We find that shifts in Sino–European political relations contribute more significantly to variations in oil market uncertainty than to other oil variables. Finally, we augment the vector autoregression model by incorporating the Sino–US political relationship index. Our findings reveal that this augmentation significantly changes the impacts. • We explore the impacts of Sino–European political relations on the oil market. • A strengthening political rapport boosts oil demand and raises prices. • The effects on oil supply and inventory appear to be insignificant. • Sino–US political relations alters Sino–European relation shocks on oil demand.