Geopolitical Risk Versus Supply- and Demand-Induced Oil Shocks

Amid ongoing geopolitical events and their associated impact on energy markets, this study probes into the predictive capability of geopolitical risk (GPR) for various components of oil shocks. It also evaluates whether incorporating GPR in oil shock-model improves the forecast accuracy of global oil shocks, focusing exclusively on out-of-sample analysis. The findings indicate that (i) GPR induces a negative shock to oil supply, (ii) GPR generates a positive shock to oil consumption demand, and (iii) GPR causes a negative shock to oil inventory demand. These predictive effects are consistent across different oil shock dynamics and at different forecasting horizons, underscoring the significance of integrating GPR into oil shock models to enhance their accuracy and reliability.