Volatility shocks in energy commodities: The influence of COVID-19

Abstract

This study investigates the impact of COVID-19 induced global panic on crude oil and natural gas volatility. The author uses the Structural Vector Auto Regression (SVAR) to examine the magnitude of shocks in global oil and gas prices caused by COVID-19 induced panic between 3rd January 2020 and 30th June 2021. The results show that shocks in oil and gas prices were negative and more severe in the first five (5) months of 2020 when the pandemic was spreading across the globe forcing countries' prices into lockdowns. The negative shocks gradually diminished in the following periods as the prices recovered courtesy of global economic recovery and vaccine rollouts. Furthermore, the panic was more pronounced in causing oil prices shocks as gas prices were already suffering amid mild temperatures during the 2020 winter season. The author stresses the need for swift actions during the early days of the crisis to adjust oil and gas supply to match demand shrinkage so as to stabilize their prices given their enormity to the global economy. The Russia-Saudi Arabia delays in agreeing on oil supply restrictions may have amplified the magnitude of negative shocks in oil prices. Existing studies have examined the country-level impacts of COVID-19 on energy prices focusing mainly on oil. However, oil and gas are among the most traded commodities in the world thus the stability of their prices is of global concern. This study examines this phenomenon on a global scale by utilizing the novel global coronavirus panic index.