High Oil Price Volatility Research Articles

Investment decision analysis of shipping desulfurization project based on a fuzzy real option approach

ABSTRACT This study addresses shipping companies’ compliance with the International Maritime Organization’s 2020 sulfur emission limits, providing guidance for investment decisions in desulfurization projects. The paper uses a novel RCFM model, integrating real option theory (R), shipping cycle theory (C), fuzzy set theory (F), and Monte Carlo simulation (M). Key findings are: (1) During high oil price volatility, traditional binary tree models show computational distortions corrected by Monte Carlo simulation, whereas in lower volatility, the fuzzy binary tree model offers reliable investment intervals. (2) Investment in desulfurization depends on remaining vessel life and fuel price differences. For example, during the recovery period, for vessels with a remaining life of less than 5 years, investing in a desulfurizer is profitable if the fuel price difference exceeds $550/t and using low-sulfur fuel is advisable if below $400/t. For vessels of remaining life of 5-9 years, invest in a desulfurizer if the difference exceeds $500/t and use low-sulfur fuel if below $300/t. For over 9 years, invest in a desulfurizer if the difference exceeds $450/t and use low-sulfur fuel if below $200/t.

The asymmetric effect of G7 stock market volatility on predicting oil price volatility: Evidence from quantile autoregression model

This paper investigates the asymmetric effect of G7 stock market volatility on predicting oil price volatility under different oil market conditions by using the quantile autoregression model. Both in- and out-of-sample results demonstrate the prediction superiority and effectiveness of the quantile autoregression model. The US and Canada's stock markets exhibit the strongest predictive ability across the entire distribution, while the UK demonstrates strong predictive power specifically during periods of high oil price volatility. Japan, Germany, France, and Italy as oil importers can predict low and median oil volatility. The strong predictability of G7 stock volatility may be attributable to their significant impact on the business cycle and investor sentiment. This asymmetric prediction ability arises not only from the average volatility shocks at various quantiles but also from the bad and good stock volatility at different quantiles. Further research suggests that bad stock volatility appears to be more predictable than good stock volatility, especially in high oil price fluctuations. Furthermore, the superiority and effectiveness of the quantile autoregression model in predicting oil volatility are proven to be applicable to emerging markets. This study may provide useful insights for policymakers, businesses, and investors to improve crude oil risk prediction and risk management under different market conditions.

Wars, cartels and COVID-19: regime switching in commodity prices

ABSTRACT Commodity prices are extremely volatile, and volatility itself fluctuates over time. Using data from 1959 to 2022, we estimate a 3-state Markov-switching model to identify expansions and contractions in oil and copper price volatility. We found a transition from a low to a medium variance regime for the oil price, in 1979, reflecting changes in the oil market structure. In addition, we identify infrequent and short-lived episodes of unusually high oil price volatility. For copper, there is no transition across regimes, and episodes of high volatility are not synchronized with the periods of high volatility in oil prices. We found that oil prices are much more volatile than copper prices in all states. Oil prices react more strongly to market cartelization, war episodes, and global demand shifts, like the 2008 Great Recession and the COVID-19.

Impact of oil price uncertainty shocks on China’s macro-economy

This study investigates the impacts of crude oil price uncertainty shocks on China’s macro-economy using empirical and theoretical approaches. The vector auto-regression with stochastic volatility in mean (VAR-SVM) model reveals that increasing oil price uncertainty significantly depresses output and raises inflation. To fully understand the transmission channels of oil price uncertainty shocks, we develop a new Keynesian dynamic stochastic general equilibrium (DSGE) model that incorporates oil demand of household, intermediate sector, and transportation sector. Increasing income uncertainty induced by high oil price volatility leads to enhanced precautionary saving and thus a decrease in consumption, particularly durable consumption, of individual households. The precautionary working mechanism is plausible in the changes of households’ labor supply and firms’ production behaviors when oil price uncertainty increases. Furthermore, with decreasing forward-looking market demand, intermediate firms choose higher prices to avert risk, which results in higher inflation in China. To explore how to mitigate the negative effects of oil price uncertainty, we consider a number of possible factors. The results illustrate that increasing competitiveness among transportation firms, reducing oil intensity of intermediate sector, targeting headline inflation by the central bank, and decreasing the Frisch elasticity of labor supply are effective measures. Our findings also suggest that deregulation of refined oil price in China would not amplify negative effects of oil price uncertainty.

Risk transmission from the oil market to Islamic and conventional banks in oil-exporting and oil-importing countries

This paper examines the volatility transmission from the oil market to Islamic banks' (IBs) share prices in two sets of data from oil exporters and importers. Our datasets comprise indices developed from banks' stocks of eight oil-exporting countries, including 41 IBs and 90 conventional banks (CBs), and five oil-importing countries, with 23 IBs and 63 CBs. We employ a trivariate version of the non-diagonal GARCH model, which allows for asymmetry in the variance-covariance matrix. Rather than relying on a single window, we perform the estimations through many recursive windows. The results reveal that oil volatility has higher predictive power (in majority recursive significant subsamples) in the exporter dataset compared to the importer dataset. We also find higher significant recursive subsamples for conventional counterparts in the same country. Holistically, IBs show greater bank stability during high oil price volatility horizons, a finding beneficial for policymakers, regulators, financial markets, IBs, and other concerned stakeholders.

Central African Economic and Monetary Community

CEMAC ended 2021 in a fragile external position, with gross reserves at only 2.7 months of prospective imports and net foreign assets (NFA) at their lowest level in decades, despite the availability of Fund financing, the SDR allocation, and monetary policy tightening. The terms of trade shock this year is expected to be broadly positive for CEMAC. This more favorable outlook is, however, subject to heightened external uncertainties associated with the fallout from the war in Ukraine (notably global inflation pressure, global growth uncertainties, and high oil price volatility), faster-than-anticipated global financial tightening, possible emergence of new COVID strains and risks from cryptoassets. Current high oil prices, if sustained, will help rebuild fiscal and external buffers, provided fiscal policies remain prudent. Shielding vulnerable populations from soaring energy and food prices adds to the complexity of navigating this uncertain environment, given CEMAC’s already limited policy options.

Oil price volatility and corporate cash holding

Since it is believed that oil price movements highly influence economic growth in oil-rich countries, this study examines the influence of oil price volatility on corporate cash holdings and adjustment speed and tests whether firms in the petrochemical industry are affected differently from firms in other industries. This study addresses these research questions using static and dynamic system GMM models on a sample of non-financial firms listed in Gulf Cooperation Council (GCC) countries between 2005 and 2019. The results of this study assert that oil price volatility has a significant impact on cash-holding decisions. Specifically, the study displays a positive and significant relationship between oil price volatility and firms' cash holdings. Again, the study discovers that firms adjust towards their target cash-holding level faster during high oil price volatility than during periods of low oil price volatility. Consistent with the trade-off theory, the study unveils that precautionary motive is a crucial factor motivating firms to retain large amounts of cash. The results also showed that firms in the petrochemical industry have a higher cash-holding ratio than firms in other industries. These results support the view that oil price volatility exposes oil-related industries to a higher uncertainty than other industries. Moreover, the findings are robust to an alternative measure of oil price volatility and model specifications.

Oil price volatility and firm profitability: an empirical analysis of Shariah-compliant and non-Shariah-compliant firms

PurposeThis study examines the impact of oil price volatility on firm profitability. As Shariah-compliant firms operate under restrictions, the study also explores whether oil price volatility affects Shariah-compliant firms differently from their non-Shariah-compliant counterparts.Design/methodology/approachThe study sample includes all non-financial firms listed on Gulf Cooperation Council stock exchanges from 2005 to 2019. In evaluating the oil price volatility–profitability relationship, static (panel fixed effects) and dynamic (system generalised method of moments) models were used.FindingsOil price volatility significantly depresses firm profitability. In addition, Shariah-compliant firms are more significantly affected by oil price volatility than their non-Shariah-compliant peers. The results suggest that high oil price volatility exposes Shariah-compliant firms to higher bankruptcy risk than non-Shariah-compliant firms and that positive and negative oil price shocks have asymmetric effects on firm performance.Research limitations/implicationsThe findings of the paper call for more economic diversification by supporting non-oil sectors in the region and raise the need for more development of Islam-compliant products that compete with traditional instruments to help Shariah-compliant firms cope with uncertainty. Moreover, managers need to prepare quick alert and response procedures to reduce the negative impacts of oil price volatility on profitability.Originality/valueTo the best of the authors’ knowledge, this study is the first to explore the relationship between oil price volatility and profitability of non-financial firms. Further, the study extends prior Islamic corporate finance literature by enhancing the understanding of how Islamic corporate decisions affect firm performance during instability.

How the fiscal and monetary policy uncertainty of China respond to global oil price volatility: A multi-regime-on-scale approach

In the beginning of 2020, significant economic recession and financial shocks directly caused by the oil price war and the outbreak of COVID-19 epidemic appear, making the connection between oil price and policy uncertainty a significant topic, especially for China, the largest emerging market and second largest oil consumer. With the monthly data of WTI oil price, China's fiscal policy uncertainty (FPU) index and monetary policy uncertainty (MPU) index from January 2000 to August 2020, this paper detailedly investigates how China's FPU and MPU respond to global oil price volatility in different oil price volatility regimes and time scales. The empirical results expose that: (1) China's FPU and MPU volatility would positively respond to WTI volatility in the low oil price volatility regime, while in the high oil price volatility regime, the FPU response is insignificant and MPU response is only significant and negative in the scale 3–4 (8–16 and 16–32 months); (2) Only in the middle-long term of low oil price volatility regime will the WTI volatility significantly respond to China's FPU and MPU volatility; and (3) The FPU and MPU volatility responses are more violent in high oil price volatility regime. Our diversified findings can be important reference for diversified market participants including policy uncertainty researchers, government policy-makers and global investors interested in the Chinese market.

Management of industrial development of oil and gas region in conditions of high oil price volatility

The article observes the factors which infl uence oil price volatility in reproduction of oil caused by ambiguity of the OPEC Plus agreement in early March 2020 and intensifi ed by reduction of oil products consumption with the new coronavirus infection at the background. The authors point out that understanding of the process of managing an open futures position until its expiration date has positive effects on the trading effi ciency both in contango and backwardation situations. They also reveal that risks are the main constraining factor for derivative fi nancial tools of underlying assets in both commodity and stock markets. Oil and gas companies, whose income tax is an essential part of oil and gas regions’ budgets and whose mineral extraction tax and export duty go to the federal budget, require government support for hedging risks. The support should be provided by means of direct budget damper mechanisms or indirect measures such as stimulation of development of financial and industrial groups. They can possess enough investment potential for hedging risks of derivatives in conditions of high oil price volatility. The article presents cluster analysis of foreign economic activity of oil and gas regions of the Privolzhsky (Volga) Federal District. The activity is focused mainly on products of fuel and energy complex as well as chemicals, plastic and synthetic rubber. By means of simplex method the author developed the optimization isoline map for risks of changing future prices of oil derivatives, losses when covering a margin account to maintain ownership and risks connected with price volatility of the underlying asset.

Oil Price Volatility and Corporate Decisions: Evidence from the GCC Region

ABSTRACTIn this study, I examine the impact of oil price volatility on corporate decisions, namely corporate investments and dividend policy. Using a sample of 356 firms from The Gulf Cooperation Council markets spanning from 2005 to 2015, I show that corporate investments and the likelihood of paying dividends is largely influenced by oil price volatility. The evidence suggests that firms tend to invest less and are more likely to choose not to pay dividends during periods of high oil price volatility. Furthermore, I find that the impact of oil price volatility on corporate decisions tends to be stronger in financially constrained firms, using firm size as a proxy. The findings of this study are robust to controlling for macroeconomic volatility and using alternative measures of oil price volatility and alternative econometric approaches.

Macroeconomic Uncertainty and Oil Price Volatility

AbstractThis paper shows that higher macroeconomic uncertainty causes higher oil price volatility. Regimes of low and high uncertainty are identified in a threshold VAR model in which the effects of structural oil demand and supply shocks are estimated. The results show that higher macroeconomic uncertainty, as measured by global industrial production volatility, significantly increases the sensitivity of oil prices to shocks in oil demand and supply. This occurs as uncertainty lowers the price elasticity of oil demand and supply. The difference in the estimated oil price elasticities is economically meaningful as the price impact of a similar change in oil production might double when it hits the economy in uncertain times. As such, varying uncertainty can explain why oil price volatility is typically higher during periods such as financial crises and recessions, and why oil price volatility changes over time more generally.

Spillover Risks in REITs and other Asset Markets

Based on Diebold and Yilmaz’s (International Journal of Forecasting 28:57–66, 2012) methodology, we estimate three return spillover indices in a four-asset system comprising equity REIT (EREIT), mortgage REIT (MREIT), stock, and bond for the sample period from January 1972 to September 2014. We find that the total return spillover risks account for about one-third of the total return variance, on average, in the four-asset system. When we add commercial real estate (CRE) to the system, but for a shorter sample period from February 1998 to September 2014, we estimate an average total return spillover risk of 28.0 %. In an extended Fama-French’s five-factor CAPM framework, we find that the net return spillover risks have significant and negative effects on EREIT and MREIT returns, but positive effects on bond return. We infer that during the period of high oil price volatility from 1978 to 1986, bond market, as a net “receiver” of market risks, increased its risk premiums in response to high spillover risks from other market. However, in the post-subprime crisis period, large spillover risks from the stock market, which is a net “transmitter” of risks, decreased EREIT and MREIT returns. We also find that CRE return is not affected by spillover risks from other markets. Institutional investors should thus not neglect spillover risks when constructing asset allocation strategies that include assets other than CRE.

Oil Price and Consumer Price Nexus in South Africa Revisited: A Novel Asymmetric Causality Approach

The relationship between oil and the price level has always garnered the attention from policy makers and researchers. Periods of high oil price volatility is thought to induce negative repercussions for domestic price levels in an oil importing country. Research in the past has revealed that there exists an asymmetric component in the causal relationship between oil prices and consumer prices. To this end, we opt for a novel asymmetric causality test developed by Hatemi-J (2012) to explore the relationship between international oil prices and the price level in South Africa for a period that runs from 1921: M02 to 2013: M10. This method disentangles the effects of positive shocks from negatives ones allowing to test for an asymmetric relationship. Our evidence are in favour of a causal relationship that runs from oil prices to the price level, but this relationship is observed only for the short term since there is no long run cointegrating relationship. The asymmetric tests reveal that both a positive and negative oil price shock leads to a positive price level shock, however the evidence in favour of a negative oil price shock is stronger.

Reverse globalization: Does high oil price volatility discourage international trade?

This paper examines whether higher oil price volatility causes a reversal in globalization. Using a large annual panel data set covering 84 countries all over the world from 1984 to 2008, we investigate the impacts of oil price fluctuations on international trade, namely exports and imports. We present strong and robust evidence that international trade flows will be lower when oil prices fluctuate significantly. We therefore conclude that oil price volatility hurts globalization.

World Crude Oil Markets: Monetary Policy and the Recent Oil Shock

This paper examines the relationship between monetary policy and oil prices within a world oil demand and supply model. Low price and high income elasticities of demand and rigid supply explain high price volatilities and producers' market power. Exchange and interest rates do influence oil market equilibrium. The relationship between oil prices and interest rates is a two-way relationship that depends on the type of oil shock. During a supply shock, rising oil prices caused interest rates to increase; whereas during a demand shock, falling interest rates caused oil prices to rise. Record low interest rates led to high oil price volatility in 2005. Data shows that world economic growth and price stability require stable oil markets and therefore more prudent monetary policies.

World Crude Oil Markets: Monetary Policy and the Recent Oil Shock

This paper examines the relationship between monetary policy and oil prices within a world oil demand and supply model. Low price and high income elasticities of demand and rigid supply explain high price volatilities and producers' market power. Exchange and interest rates do influence oil market equilibrium. The relationship between oil prices and interest rates is a two-way relationship that depends on the type of oil shock. During a supply shock, rising oil prices caused interest rates to increase; whereas during a demand shock, falling interest rates caused oil prices to rise. Record low interest rates led to high oil price volatility in 2005. Data shows that world economic growth and price stability require stable oil markets and therefore more prudent monetary policies.