The run-up in oil prices since 2004 coincided with growing investment in commodity markets and increased price comovement among different commodities. We assess whether speculation in the oil market played a key role in driving this salient empirical pattern. We identify oil shocks from a large dataset using a factor-augmented autoregressive (FAVAR) model. This method is motivated by the fact that the small scale VARs are not infomationally sufficient to identify the shocks. The main results are as follows: (i) While global demand shocks account for the largest share of oil price fluctuations, speculative shocks are the second most important driver. (ii) The comovement between oil prices and the prices of other commodities is explained by global demand and speculative shocks. (iii) The increase in oil prices over the last decade is mainly driven by the strength of global demand. However, speculation played a significant role in the oil price increase between 2004 and 2008 and its subsequent collapse. Our results support the view that the financialization process of commodity markets explains part of the recent increase in oil prices.

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