Bubbles in Crude Oil and Commodity Energy Index: New Evidence

Christos Floros,Georgios Galyfianakis

doi:10.3390/en13246648

Christos Floros, Georgios Galyfianakis

Open Access

https://doi.org/10.3390/en13246648

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Journal: Energies	Publication Date: Dec 16, 2020
Citations: 13	License type: CC BY 4.0

Affiliation: Hellenic Mediterranean University

Abstract

This paper considers a long dataset of both Brent and West Texas Intermediate (WTI) crude oil prices and the Commodity (fuel) energy index (CEI) to identify possible bubbles. Using the Supremum Augmented Dickey–Fuller (SADF) test, we compare results from WTI and Brent with CEI. We prove that the CEI follows Brent crude oil (they provide similar bubble periods) and that Brent is recognized as a crude oil benchmark. Financial managers should incorporate it into their analysis and forecasts. The findings are strongly recommended to energy policymakers and investors.

Highlights

Are there bubbles in the energy market? This question is still important to be answered due to the fact that energy prices fluctuate over time for many reasons
We prove that the Commodity (fuel) energy index (CEI) follows Brent crude oil in the way that they provide similar bubble periods and that Brent is recognized as a crude oil benchmark
When we compared the supremum ADF (SADF) results for the crudes, we found that Brent showed more bubble periods compared to West Texas Intermediate (WTI)

Summary

Introduction

Are there bubbles in the energy market? This question is still important to be answered due to the fact that energy prices fluctuate over time for many reasons (economic, geopolitical, etc.). Lammerding et al [6] reported that the price movement explanations were: (1) Oil supply shocks, (2) oil demand shocks driven by global economic activity, and (3) oil-specific demand shocks They argue “that price changes due to financial shocks may lead to speculative bubbles” [6]. Liu and Lee [4] reported that the fluctuation of energy prices indicates that prices can systematically deviate from their fundamental values They argued that the volatility of energy prices has a significant impact on macroeconomic variables such as the consumer price index and economic growth. Several studies examined the behavior of energy prices and reported that there exist bubble components in the prices due to several reasons [11,12].

Literature Review

Market and Data Description

Methodology

Results and Conclusion