This paper identifies supply and demand shocks that are specific to the oil-market, and separates them from economy-wide shocks that affect the demand for many asset classes, including oil. The shocks are identified by the sign and magnitude of the correlation between daily oil-price percent-changes and the aggregate stock-market total-returns, excluding internationally diversified oil companies. Shocks that are specific to the oil-market - prominently due to geopolitical events in the Middle East or changes in the expectations thereof - are identified as inducing a negative contemporaneous correlation between oil-price changes and stock-market returns. On the other hand, economy-wide shocks - prominently due to unexpected global economic booms or busts - are identified as inducing a positive correlation. I employ a novel reduced-form methodology to show clear-cut empirical evidence regarding the macroeconomic effects of these shocks on the future realizations of the US stock-market excess-return, dividend growth-rate, and real-GDP growth- rate. Intuitively, the effects are of opposite sign depending on whether the oil-price change originated from an oil-market-specific or from an economy-wide shock. I show these shocks also have strong predictive power over future realizations of the spot-oil price-change and oil-futures excess-return. I then present a dynamic stochastic general equilibrium (DSGE) model comprised of a representative consumer, a firm, and an oil-sector with storage technology. A simplified version of the model allows for structural recovery of the theoretical counterparts to the above shocks, which line up nicely with the reduced-form ones. The full-blown model motivates the identification scheme by qualitatively matching the sign of the impulse-responses of the relevant endogenous variables to several explicitly modeled shocks. It furthermore quantitatively matches key asset-pricing, macroeconomic, and oil-market-specific unconditional moments.
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