This paper studies the oil market within a general equilibrium production-based asset pricing framework. The interplay of exogenous oil productivity shocks and endogenous fluctuations in oil demand resulting from macro shocks generates the stylized facts of oil futures prices and volatilities. In addition, I show that a long-run component of macroeconomic productivity risk and oil inventory holdings are key ingredients to produce a sizeable positive risk premium for short-term oil futures and an upward-sloping term structure of risk premia, as observed in the data. Finally, the differential response of oil prices and investment returns to different types of shocks in the model sheds light on the intricate relationship between oil and equity returns.
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