Energy Commodities Research Articles

Endogenous thresholds in energy prices: Modeling and empirical estimation

Spot prices or front-month futures prices for energy commodities can exhibit occasional sharp peaks and drops (even to negative values), accompanied by large backwardations or contangos and unusually low or high levels of working stocks. We present a model of storage arbitrage that rationalizes such episodes, relevant for markets for energy commodities such as petroleum, natural gas, or storable electricity, where free disposal is not available. Based on price data only, we offer an empirical approach to estimate key parameters that determine the dynamics of prices, including endogenous price thresholds that indicate lower and upper bounds on discretionary stocks. Price movements in the regime within these bounds are moderated by responses of speculative storage. In the two regimes where price is respectively above or below threshold prices, sharp price jumps are more likely. We are the first to prove consistency and asymptotic normality of a method of estimating this model on prices with endogenous jumps. We explore the behavior of our estimator for small samples, and illustrate its application using petroleum prices. Although the model structure and the distributions of the disturbances in the Euler equation are quite complex, a nice feature of our estimator is its simplicity; it is straightforward non-linear least squares. Moreover, our estimation approach is robust to the demand functional form and the distribution of the shocks.

Time-frequency volatility connectedness between fossil energy and agricultural commodities: Comparing the COVID-19 pandemic with the Russia-Ukraine conflict

This paper uses the TVP-VAR frequency connectedness approach to compare the volatility connectedness induced by the COVID-19 pandemic and the Russia-Ukraine conflict. Both shocks induce increased connectedness, but the pandemic shock is stronger. High-frequency and medium-frequency connectedness dominate during the early stage of the pandemic, while low-frequency connectedness dominates during the conflict. Moreover, fossil energy is the risk transmitter in the early phase of the pandemic, while agricultural commodities become the transmitter during the conflict. We should take precautions against risks contagion from fossil energy and agricultural commodities to the post-conflict economy, and prevent inflation and economic slowdown.

Less disagreement, better forecasts: Adjusted risk measures in the energy futures market

AbstractThis paper develops a generic adjustment framework to improve in the market risk forecasts of diverse risk forecasting models, which indicates the degree to which risk is under‐ and overestimated. In the context of the energy commodity market, a market in which tail risk management is of crucial importance, the empirical analysis shows that after this adjustment framework is applied, the forecasting performance of various risk models generally improves, as verified by a battery of backtesting methods. Additionally, our method also lessens the risk model disagreement among post‐adjusted risk forecasts.

Investigating the spillovers between energy, food, and agricultural commodity markets: New insights from the quantile coherency approach

Investigating the spillovers between energy, food, and agricultural commodity markets: New insights from the quantile coherency approach

Impact of the COVID-19 Pandemic on the World Energy and Food Commodity Prices: Implications for Global Economic Growth

The negative socio-economic consequences of the COVID-19 pandemic are widely discussed. However, relatively less attention is paid to its impact on the world commodity price formation including energy and food prices. The aim of this paper is to examine the impact of the COVID-19 pandemic on world energy commodity prices and their interactions with world food commodity prices. Using the World Bank data on commodity prices we look for evidence of changes in energy and food prices caused by occurrence of the COVID-19 pandemic, which was assumed to be a negative shock to the global economy in terms of both supply and demand. Based on data series analysis of indices of world energy and food commodity prices, it is evident that after the outbreak of the COVID-19 pandemic the energy prices, especially oil prices, plummeted. Food prices followed the same direction; however, their plunge was much less extreme. In general, it can be concluded that the pandemic caused a severe energy price shock which clearly had a negative impact on global economic growth, but the scale of this impact differs depending on the type of economic sector and countries’ net export positions in energy and food trade.

Investigating volatility spillover of energy commodities in the context of the Chinese and European stock markets

This paper investigates spillover from energy commodities to Shanghai stock exchange and European Stock market, and identifies possible risks transmission and portfolio diversification opportunities. The study is conducted on daily spot prices of carbon (CO2) emission, natural gas and crude oil from 16 December 2010 to 29 December 2022, employing Granger causality test, dynamic conditional correlation (DCC), Diebold-Yilmaz (2012) and Barunik-Krehlic (2017) models. Results identify higher volatility and imply greater connectedness in the longer run. Additionally, natural gas is witnessed as the highest contributor of the shocks and crude oil as the highest receiver of the shocks from the network connection. Further results suggest for investment in energy commodities in shorter run rather than long run for efficient portfolio diversification. Results from this study are expected to have practical implications for portfolio managers, investors, and market regulators, given the suggestion of this study to incorporate energy stocks for efficient diversification of risk.

Russian-Ukrainian War and its Economic Implications on the Prices of Strategic Commodities.

Russia–Ukraine war has increased systemic vulnerabilities of the global economy. Therefore, the purpose of this study is to identify the economic implications of the Russian-Ukrainian war (2022) on the global prices of strategic commodities. Strategic commodities were divided into three main types: energy commodities, food commodities, and mining commodities. According to World Bank reports, the monthly data of commodities prices from M05/2021 to M05/2022 has been used. In addition, a comparative analysis approach was used to compare the prices of commodities before and after the war. The study concluded that the Russian-Ukrainian war had a negative impact on the prices of energy commodities, especially crude oil, natural gas and coal. The results indicated that the Russian-Ukrainian war negatively affected the prices of food commodities such as wheat, maize and oil. The study found that some mining commodities such as aluminium, nickel and zinc were negatively affected by the war.

Geopolitical Risk and Energy Market

Abstract The fundamental aim of this paper is to test the symmetric and asymmetric effects of geopolitical risk on the five selected prices of energy commodities, consisting of coal, crude oil, gasoline, heating oil, and natural gas, during the period 2 January 2020–29 July 2022 by application of linear and nonlinear ARDL models. Moreover, we also study the impact of anticipated financial volatility on energy commodities. Our results suggest that, over the long term, there is no linear relationship between geopolitical risk, financial volatility, and energy prices. On the other hand, we find statistically significant asymmetrical effects of geopolitical risk and financial volatility on crude oil, gasoline, and heating oil prices in the long and short run. We also identify that coal and natural gas prices do not respond to changes in geopolitical risk during the analysed period.

Material flow and economic cost analysis of the Italian artisan bread production before and during the Russia-Ukraine conflict

The Russia-Ukraine conflict represents a humanitarian crisis and causes several socio-economic consequences, being Russia a key supplier of energy and food commodities. After a few weeks of war, the prices of the essential goods, already increased due to the COVID-19 pandemic crisis, have continued to boost. The present research applies the material flow analysis to assess the sustainability of the artisan bread production, comparing a baseline and a war scenario, before and during the aforementioned conflict, and estimates the economic costs associated with natural and energy resources. The analysis is based on primary data collected through semi-structured interviews among nine artisan bakeries and secondary data collected before and during the conflict. The economic assessment, which is applied to enhance the environmental management of sociometabolic systems, is conducted on the entire artisan bread produced in Italy in 2021 and the system boundaries consider a cradle-to-gate approach. The highest upsurge in input costs has been estimated in electricity (+400%), N fertilizer (+233%) and K2O (+152%). The average input cost variation has been evaluated at +232%. Possible opportunities to support production costs include the adoption of an alternative bread recipe, which reduces the supply of impacting resources without affecting the quality of the finished product, as well as the introduction of structural interventions to lower energy costs. The research could help both artisan bakers, to better manage resources, waste and related impacts under the economic and the environmental perspective, and public authorities, to define appropriate strategies to sustain the bread sector. Last, the research provides scholars with an original analysis of the economic costs in the artisan bread production, highlighting its suitability to evaluate the supply chain sustainability from cradle to gate.

Forecasting Commodity Market Synchronization with Commodity Currencies: A Network-Based Approach.

This paper shows that some commodity currencies (from Chile, Iceland, Norway, South Africa, Australia, Canada, and New Zealand) predict the synchronization of metals and energy commodities. This relationship links the present-value theory for exchange rates and its connection with commodity export economies' fundamentals, where prospective commodity price fluctuations affect exchange rates. Predicting commodity market return synchronization is critical for dealing with systemic risk, market efficiency, and financial stability since synchronization reduces the benefits of diversification and increases the probability of contagion in financial markets during economic and financial crises. Using network methods coupled with in-sample and out-of-sample econometrics models, we find evidence that a fall in the return of commodity-currencies (dollar appreciation) predicts an increase in commodity market synchronization and, consequently, in commodity market systemic risk. This discovery is consistent with a transitive capacity phenomenon, suggesting that commodity currencies have a predictive ability over commodities that extend beyond the commodity bundle that a country produces. The latter behavior would be exacerbated by the high financialization of commodities and strong co-movement of commodity markets. Our paper is part of a vigorously growing literature that has recently measured and predicted systemic risk caused by synchronization, combining a complex systems perspective and financial network analysis.

Exploring the Time-varying Connectedness and Contagion Effects among Exchange Rates of BRICS, Energy Commodities, and Volatilities

This paper investigates the total and net directional connectedness of the energy market and currency market amid volatilities (local and international) of BRICS for the period May 7, 2012 to March 31, 2022. The Time-varying parameter Vector Autoregression (TVP-VAR) connectedness approach is specifically employed. We reveal that the average value of the total connectedness index (TCI) is 46.91%, for the specific network of energy commodities, currency rates, and volatilities. Also, from the averaged dynamic connectedness, the global energy commodity index demonstrated the most transmitter of shocks. Conversely, BRICS currency markets (except for Brazilian Rubble) and most implied energy volatilities and realised exchange rate volatilities were net receivers of shocks. Moreover, the total connectivity indices were seen to vary significantly during the study sample period with strong susceptibility to crisis periods, especially, the COVID-19 pandemic. We advocate that most volatilities were consistent net transmitters across time as indicated by the net directional connectedness. The findings imply that in a network of energy commodities, exchange rate, and volatilities, risk minimisation is elated to boost investors’ confidence across time.

WTI Crude Oil Options Market Prior to and During the COVID-19 Pandemic

The COVID-19 pandemic has caused turbulence in many areas of the global economy. It also contributed to an increase in volatility on the energy commodities market. This spilled over into the derivatives market, particularly the crude oil futures market. The aim of the article is to compare the costs and effectiveness of using options on WTI oil from before and after the pandemic. The analyzes took into account the value of option premiums and final results obtained by buyers of call options from March 1, 2018 to April 14, 2022. The results showed that buyers of call options during the pandemic, despite paying much higher option premiums, experienced significantly higher payouts and rates of return. They were the highest for options with the longest expiry periods of 21-30 days. Research also showed that during the pandemic, options with strike prices set at a level higher than the price of oil on the contract date had particularly high rates of return, while the highest payout values were achieved by buyers of call options with low strike prices.

Electricity Prices in the European Union Region: The Role of Renewable Energy Sources, Key Economic Factors and Market Liberalization

Electricity is by far the most valuable energy commodity for households; hence, it is of the utmost importance for national regulatory authorities and the European Commission (EC) to guarantee affordable and unimpeded access for European citizens to this vital social good. The existing academic literature mainly focuses on the effect of specific renewable energy resources (RES), such as solar, wind, etc., on electricity prices, thus neglecting the crucial impact of the electricity market structure. In an effort to fill this gap, the present paper attempts to clarify whether the real effect of the share of total renewable energy production in the generation scheme and certain electricity market liberalization indices constitute key determinants of household electricity prices. The study is further innovative on the grounds that the empirical analysis utilizes both static and dynamic panel methodologies for a dataset including several variables introduced for the first time in academia. The dataset consists of yearly observations regarding 26 EU countries for a time horizon from 2003 until 2019. The econometric outcomes revealed the complex relationship between RES deployment and generation concentration with the level of household electricity prices. In contrast, the deregulation of the retail market and especially the presence of many retailers with a market share exceeding 5% can benefit European consumers by reducing electricity prices. Additionally, the relative costs concerning the outward-orientation of the economy and the power system’s upgrade were found to be transferred to the final electricity price. The opposite applies to environmental taxes, allowing European governments to accumulate considerable funds for ecological and environmental protection actions. Lastly, due to the estimated slow adjustment rate of electricity prices, policymakers are advised to develop long-term strategic energy planning.

The US-China trade war and the volatility linkages between energy and agricultural commodities

Any disruptive changes in the competitive environment, such as the U.S.-China trade war, may influence the price volatility of crude oil and agricultural commodities. This study examines the volatility linkage between crude oil and agricultural commodity markets in the context of the U.S.-China trade war and compares the impact of the trade war with that of other exogenous shocks. The results show that the volatility of soybeans exhibits the highest level of responsiveness to the U.S.-China trade war - which is not surprising given that the U.S. agribusiness trade to China is dominated by soybeans - followed by coffee and cotton. The sizes and dynamics of the impacts of shocks are largely commodity-specific. Notably, the trade war impacts most agricultural commodities more extensively than other exogenous shocks, including the global financial crisis and the COVID-19 pandemic and associated recession. These findings matter not only for the decision-making of investors and portfolio managers but also for commodity-exporting and importing countries because changes in the volatility dynamics of crude oil and agricultural commodities often impact export revenues and import expenditures and consequently feed through exports to the global supply chain under exogenous shocks such as the U.S.-China trade war.

The Distribution of Commodity Futures: A Test of the Generalized Hyperbolic Process

ABSTRACT Using daily closing price data spreading over 3 April 1990, to 5 May 2020, this study explores the skewness and excess kurtosis behaviour across energy, metals, and agricultural commodity futures. Subsequently, it compares the fitting of an empirical distribution under normal distribution assumption with those under the Generalized Hyperbolic distribution. The generalized hyperbolic distribution includes Hyperbolic distribution, Variance-Gamma distribution, and Normal Inverse Gaussian distribution. The results show that the Normal Inverse Gaussian distribution for natural gas, gold, platinum, copper, sugar, and feeder cattle futures captures skewness as well as excess kurtosis of the daily logarithmic returns. The findings are robust to the sub-sample analysis.

서방의 대 러시아 에너지 부문 제재와 러시아의 대응

Energy industry sanctions, which form the core of economic sanctions against Russia, began in earnest after Russia annexed Crimea in 2014. Following the outbreak of war in Ukraine in February 2022, the US and EU significantly strengthened sanctions on the energy industry, which is the backbone of Russia's economy and accounts for more than 50% of its exports. Russia is not only Europe's No. 1 supplier of energy resources, but also occupies a very important position in world energy trade, accounting for 20% of total global trades of energy commodities. Political conflicts between major exporters and importers such as Russia, the US and Europe have greatly increased uncertainties in the energy market. This is having a huge impact on the world economy. As a result of the sanctions, the Russian energy industry has been forced to change its structure. If the previous goal was to develop the energy industry and further strengthen its position as the largest exporter of natural resources, the current goal has to be revised to minimize losses caused by sanctions. In the future, Russia is expected to increase exports to the Asian market, focusing on cooperation with China and India. It is expected that costs will increase because productivity and efficiency decrease as access to foreign technology and equipment becomes difficult. The policy to localize Western equipment and technology subject to sanctions will be pushed more strongly, but this will inevitably cost considerable money and time. At present, Russia's exports of energy regenerate maintain a high export value due to high prices, although the export volume has decreased. It is difficult for Europe to fully replace Russian energy resources in the short term. For the time being, due to increased exports to Asia and relatively high energy commodity prices, Russia's energy resource exports are expected to remain high for a considerable period of time. The Russian energy industry will play an important role in the Russian economy and international energy market for some time, but its current share will decline more rapidly than previously anticipated. In an unprecedented and unpredictable situation, the Russian energy industry is facing a previously unimaginable challenge to maintain the status quo or to minimize the decline in production and exports.

Time-frequency connectedness between energy commodities and the influence of uncertainty measures

Commodities have become a new tool for global diversification among stocks, currencies, and other assets. Their dynamics and statistical characteristics have become crucial to financial research. Furthermore, in the connected world of today, the importance of uncertainties is greater than ever. This article examines the comovements between energy commodities and the influence of uncertainty measures through the bi, partial and multiple wavelet techniques. We show the significance of uncertainties by highlighting their influence on financial decisions. To measure uncertainty, we use GEPU, OVX, and VIX. By using the wavelet approaches, we examine how energy commodities interact in both the time and frequency domains, which helps us better comprehend interdependencies. The results show that most energy commodities display high comovements in the short-, and long-terms, except with natural gas. According to the partial wavelet, OVX has the most significant impact on the connectedness amongst energy commodities. For the wavelet multiple cross-correlations, Petroleum maximises the multiple cross-correlations at most scales (short, medium and long terms) followed by Brent crude with a potential to lead or lag. These findings have substantial policy implications for policymakers as well as meaning for investors.

Transition risk, physical risk, and the realized volatility of oil and natural gas prices

The climate change-related risks have been classified into two namely physical risk and transition risk based on the losses suffered and the response to mitigate and adapt to the paradigm shift in environmental sustainability. Consequently, we test how much predictive value can be exploited from these components of climate risks if they are observed in the pricing of energy commodities that are known to be among the largest emitters of emissions. We note three findings in our empirical analyses in this regard. First, we establish that climate risk influences the volatility of crude oil and natural gas markets and improves their out-of-sample forecasts. Second, the transition climate risk more accurately predicts the out-of-sample forecasts of energy market volatility than the physical climate risk suggesting that investors respond more to the various policies/programmes/initiatives aimed at mitigating the climate change-related losses and fatalities and adapting to the paradigm shift in environmental sustainability than paying attention to the physical damages associated with climate change. Finally, investors are more likely to derive higher economic gains when climate risk is observed than when it is not and the outcome from transition risk is greater than that of physical risk. We further highlight some implications of our findings for investors and policy makers.

Russia’s development strategy in the context of the global geo-economic paradigm shift

Aim.The presented study aims to substantiate the paradigm shift in global economic development and to identify the impact of this process on the Russian economy.Tasks.The author investigates scientific papers on the research topic; analyzes the mechanism of interaction between nominal and resource systems and substantiates the use of the dollar and the euro as world currencies as a prerequisite for determining the nominal demand system in the resource market; examines the trend of the dollar and euro losing their dominant position in the global financial system and its stability; advances arguments for a paradigm shift in global economic development and determines the impact of this process on the Russian economy in the medium and long term.Methods.This study uses the methods of analysis, synthesis, generalization, and a systems approach.Results.World economy is presented as a mechanism based on the interaction between the real and the resource systems. The increasing gap between these systems at the present time is substantiated. Arguments in favor of the existence of a stable process of de-dollarization as a prerequisite for such a gap are provided. Based on the conducted analysis, a steady trend of the dollar losing major functions of world money in certain countries and country associations that are strategically important for Russia has been revealed. The existence of a paradigm shift in global world development, which consists in replacing the demand for reserves with the demand for resources, is substantiated. It is shown that for Russia, the existing changes make it possible to effectively distribute raw energy resources from the perspective of the country’s geo-economic and geopolitical interests. It is substantiated that the export of energy commodities from Russia will be irrelevant in the long term. In conclusion, the author suggests appropriate directions for a long-term development strategy.Conclusions.Currently, there is a global economic paradigm shift, which involves demand for raw materials being replaced by demand for foreign exchange reserves. Considering Russia’s role in the global mineral commodity market, the existing changes make it possible to effectively distribute raw energy resources from the perspective of the country’s geo-economic and geopolitical interests. In the medium term, the demand for Russian hydrocarbon resources will be ensured by the growing economic potential of major importers. In the long term, the leading importers of hydrocarbons will develop renewable and hydrogen energy, which will lead to the rejection of energy imports. Thus, Russia’s long-term geo-economic strategy should focus on the development and export of scientific, technological, and innovative products.

Co-movement between commodity and equity markets revisited—An application of the Thick Pen method

This paper analyses interdependence between the returns of specific energy and non-energy commodities and equities using (i) Thick Pen Measure of Association (TPMA) and (ii) Multi-Thickness Thick Pen Measure of Association (MTTPMA). We capture time-varying co-movement and co-movement across different time scales to analyse the short-term and long-term features of the time series using stationary data. Energy index futures show an increase in co-movement with equities since the start of the financialisation period. There are asymmetric effects in cross-scale co-movement between various commodities and equities. Weak co-movement between equity and specific commodity futures indicates diversification benefits for short-term and long-term investors.