Examining the dynamic effect of COVID-19 pandemic on dwindling oil prices using structural vector autoregressive model

Abstract

Emergence of COVID-19 pandemic in China hit oil prices most, traded at a negative for the first time ever in the international oil market. In this paper, we examine the dynamic effect on four major oil prices of COVID-19 with reference to China and Nigeria. We use daily frequency data, and employ structural vector autoregressive method for the analysis. We find that the impact of COVID-19 pandemic accounted for smallest shares of movement in Bonny and Daqing oil prices, only 14% in China's Daqing and 17% in Nigeria’ Bonny, and the effect is even weaker on BRENT and WTI, 7% on each price as forecast error parameters indicate. This shows that the impact of infections of COVID-19 can short-lived and leave a minimal impact on economies, but the reaction of the market itself is subject matter. Thus, it is predicted that oil prices are likely to rise in future weeks as oil demand and major economies are expected to fully open and quickly recover. China may need to take advantage of the present low oil price to benefit its economy, while Nigeria may need to be careful in external borrowing binge embarked on to cushion the effect of oil price falls as it may debt-trap the economy.