World Crude Oil Market Research Articles

Cross-Market Volatility Dynamics Among Crude Oil and South Asian Emerging Markets During the COVID-19 Pandemic.

The COVID-19 pandemic had profound impacts on the global economy, initially triggering a severe economic downturn due to widespread lockdowns, this outbreak generated various economic shocks, a major one being the oil price crash. A brief understanding of how this pandemic is affecting the financial markets, empirical analysis is done on three financial markets. Three stock exchange markets are selected from emerging markets in South Asia (Pakistan, China, and India). The world crude oil market is selected as a reference, to how it transmits volatility to South Asian markets during the COVID-19 period. We employ a bivariate BEKK-GARCH model for analyzing the volatility spillover from November 19, 2019, to March 31, 2021. All markets show negative coefficients with the oil market, indicating that the previous day’s shocks in oil prices reduce today's stock market volatility, with significant values for India and Pakistan. China has a negative coefficient while the rest of the two markets show a positive and significant coefficient means past volatilities in the stock market decrease today’s oil market volatility, likely indicating a reactive or adaptive market behavior to stock volatility. Generally, oil price changes have a significant impact on these markets, with both immediate effects (via ARCH terms) and persistent effects (via GARCH terms). The study's findings offer valuable insights for policymakers, as they help identify the direction of spillovers among interconnected economies. Additionally, portfolio investors can use this information to effectively allocate weights to different asset classes when making investment decisions.

The dependence structure and causality detection in crude oil markets

ABSTRACT It is essential to capture the dependence structure among the world’s dominant crude oil markets for understanding the world’s crude oil pricing mechanism. The dependence structure and interaction between Shanghai International Energy Exchange (INE) market and other major crude oil markets in the world are investigated to determine whether the world crude oil market is efficient. Using the vine copula model based on GARCH, we analyze the dependence structure and interactions among these markets. The highest dependence is found between West Texas Intermediate (WTI) and BRENT crude oil markets, displaying strong symmetric tail dependence. DUBAI market exhibits unidirectional Granger causality to WTI and INE markets. Empirical results suggest that the world crude oil markets are not efficient and are far from One Great Pool. DUBAI and Brent markets emerge as leaders in the current international crude oil pricing system, while INE markets do not significantly influence DUBAI and BRENT markets.

Co-movements of crude oil prices

ABSTRACT This paper investigates whether the world crude oil market is globalised in a ‘one great pool’ or is regionalised by examining the prices of 21 different types of crude oil from various regions worldwide. We employ monthly data from October 2011 to November 2020 to construct spatial panel data models. Using three weight matrices, we account for the physical properties affecting crude oil quality and geographical factors. The resulting empirical evidence reveals that although we cannot refute the globalisation hypothesis, there are distinct price mechanisms specific to each type of crude oil. The pricing of crude oil appears to be influenced by a combination of similar and dissimilar qualities, including American Petroleum Institute gravity (API) gravity, sulfur content and geographical location.

Spillover effect of crude oil futures market: An empirical research from emerging market

The world crude oil market is an important place for investors to engage in international financial investment activities, which profoundly impacts the economic activities of all countries. This paper aims to provide empirical support for the decision-making behavior of cross-border enterprises, international investors, and government regulatory authorities. This paper constructs a risk spillover effect measurement model based on the GARCH-CoVaR model. Firstly, the GARCH model fits the logarithmic rate of return of RMB and crude oil price data. Secondly, Copula is used to estimate its joint distribution. Finally, the risk spillover effect is calculated by the Covar model. We selected the emerging market (Shanghai crude oil futures market) as the research object. The research found that the Shanghai crude oil futures market has a significant inverse volatility spillover to the onshore exchange rate market and a two-way positive volatility spillover to the offshore exchange rate market; Then, we conducted a robustness analysis and found that there is a significant two-way risk spillover among offshore exchange rate market and international crude oil market, and there is a downward risk spillover among international crude oil market and onshore exchange rate market.

The Brent-WTI spread revisited: A novel approach

This paper takes a novel approach to analyze movements of the Brent-WTI spread over the years 2005 through early 2020. It adds to the existing literature by providing new insights that allow us to better understand to what extent the world crude oil market is truly ‘one great pool’. Our research is based on the premise that the place of physical competition between Brent and WTI is an important factor in determining traders’ actions and therefore the Brent-WTI spread. Changing crude oil flows in the U.S. due to the tight oil revolution together with changes in worldwide demand and supply have changed trade patterns and the location of physical competition between these two crudes. We develop three scenarios using ARIMAX-GARCH and Markov-Switching models. Scenarios 1–3 provide estimates of the impact that variables driving crude oil traders’ decisions have on the Brent-WTI spread. Additionally, we find that the change in the relationship between Brent and WTI that has been observed in the past decade appears to be fundamental, suggesting that the historical premium of WTI to Brent in the futures market is unlikely to return in the near future.

Identifying the comovement of price between China's and international crude oil futures: A time-frequency perspective

Identifying the comovement of price between China's and international crude oil futures can help different market players gain a deeper understanding of the world crude oil market. This paper uses the wavelet (wavelet coherence and phase) methods to study the comovement characteristics at different time scales from three aspects (the strength of comovement, the direction of comovement and the lead-lag relationship of price fluctuation) and uses the complex network method to explore the evolutionary characteristics of the comovement with time. We use the daily closing prices of WTI, Brent and China's crude oil futures (INE) as sample data. The results show that the comovement between INE and international crude oil futures is extremely different from that between other international crude oil futures, and the comovement at different time scales is also different. Compared with the comovement between WTI and Brent crude oil futures, the comovement strength between INE and international crude oil futures is weak and the comovement direction is unstable. China's crude oil futures price fluctuation also tends to lag behind that of international crude oil futures. Compared with the long-term, the short-term comovement strength is weaker, the comovement states are more diverse and the transition between comovement states is more complex. Moreover, during the evolution of time, some comovement states have a higher probability of occurrence and they are also more stable than others. These findings are helpful for policy makers to design policies and for investors to make investment decisions.

Revisiting the Integration of China Into the World Crude Oil Market: The Role of Structural Breaks

The China’s crude oil futures market (INE market), as it was first launched in late March of 2018, quickly draws much attention from global investors. In reference to the high frequency data, this research explores how well this new product reacts efficiently to international influences and to what extent it can be integrated with traditional benchmarks such as WTI and Brent. The multivariate GARCH models are employed to capture the cross-market time-varying correlations, return and volatility spillovers, which are modified by incorporating the detected structural breaks in the return dynamics to improve the accuracy of model estimates. Empirical results indicate a strong integration of INE market with these international benchmarks. A high but time-varying correlation is observed with recurring highs around 0.7. Spillover effects have included significant bidirectional return and volatility spillovers between the INE and the international benchmark markets. Secondly, INE market appears to interact better with the Brent market than with the WTI market. Thirdly, structural breaks can influence correlations, the portfolio weights and hedge ratios. Lastly, the correlation between crude oil futures markets decreases significantly during the periods when structural breaks caused by economic and/or geopolitical events are identified. These findings have important implications in policy makings and economic decisions on portfolio management and hedging strategies.

Nexus of Oil Price Pass-Through and Exchange Rate: Evidence from US and China

Due to technological innovation and energy consumption growth in recent years, US and China become increasingly important players in the world crude oil market and are growingly exposed to not only supply and demand shocks but also foreign exchange risks. To better understand the nexus of crude oil prices and exchange rate, we construct a nonlinear vector autoregressive model to investigate the nonlinear and asymmetric relationships among the US and China’s crude oil prices and the RMB-dollar exchange rate. This study finds that the interactions between US and China’s crude oil prices and the effect of exchange rate on oil prices are time-varying and, more importantly, dependent on oil price regimes. The reform of China’s exchange rate system has significantly impacted the dynamic relationship by enhancing China’s influence on the oil pricing in the world market.

The role of market expectations in commodity price dynamics: Evidence from oil data

This paper examines the contribution of market expectations to commodity price dynamics. It proposes a dynamic competitive storage framework with an explicit expectations shock along with concurrent shocks to study the commodity price movements. This allows for a refined analysis of the expectations’ effect on price and inventory and the estimation of the expectations. Applied to the world crude oil market, it finds that the contribution of market expectations to the crude oil spot price movements is limited from 1987 to 2014.

A Markov regime-switching model of crude oil market integration

This paper revisits the globalization-regionalization hypothesis for the world crude oil market. We examine long-run equilibrium relationships between major crude oil prices–WTI, Brent, Bonny Light, Dubai and Tapis–and focus on the adjustment behaviour following disequilibrium states. We account for a changing adjustment behaviour over time by using a Markov-switching vector error correction model. Our overall findings suggest that the crude oil market is globalized. Dubai turned out to be the only weakly exogenous price in all regimes, indicating its important role as a benchmark price. Furthermore, an interesting finding of our study is that the degree of market integration seems to be connected to global economic uncertainty.

The Role of Market Expectations in Commodity Price Dynamics: Evidence from Oil Data

This paper examines the contribution of market expectations to commodity price dynamics. It proposes a dynamic competitive storage framework with an expectations shock explicitly along with concurrent shocks to study the commodity price movements. This allows for a more refined analysis of the expectations’ effect on price and inventory and the estimation of the expectations. Applied to the world crude oil market, it finds that the contribution of market expectations to the crude oil spot price movements is limited from 1987 to 2014.

Partial equilibrium modelling of world crude oil demand, supply and price

Oil production strategies define to a large extent the future of the world crude oil market. This paper aims at modelling the long-term world crude oil supply and demand, as well as the global oil price. The main assumption is that non-OPEC and OPEC oil producers act as price-taker and strategic players respectively. The world crude oil demand is modelled as a linear price dependent function. We compare four scenarios to diagnose the OPEC’s supply behaviour: “cartel”, “oligopoly”, “mixed-cartel” and “mixed-oligopoly”. A Mixed Complementarity Problem, MCP, is used to find the Nash equilibrium point of each game scenario. The OPEC countries maximize their individual total discounted profits in “oligopoly” scenario and their joint profit in “cartel” scenario. In “mixed-cartel” and “mixed-oligopoly” scenarios, OPEC members implement their market power on the quantities allocated to export rather than their total supply. It seems to happen often that OPEC members change their level of collaboration. As the historical statistics of 2012–2015 lie between the model results of “mixed-cartel” and “oligopoly” scenarios, it seems that OPEC’s strategy has been a mixture of the both scenarios and the reason of price collapse in 2015 was that OPEC cartel structure weakened. Model outputs show that oil price will soar again in all scenarios. OPEC’s production strategy can push this price soar back most in the “mixed-oligopoly” scenario to 2026.

Evolution of the world crude oil market integration: A graph theory analysis

This paper investigates the evolution of the world crude oil market and the pricing power for major oil-producing and oil-consuming countries using graph theory. A minimal spanning tree for the world crude oil market is constructed and some empirical results are given. The integration of the world crude oil market is verified. Furthermore, the world crude oil market is characterised as a geographical and organisational structure. The crude oil markets of adjacent countries or regions tend to link together, while OPEC is well-integrated. We also found that the links in the South and North American region and the African region are relatively stable. The crude oil markets in the U.S., Angola and Saudi Arabia take up the core, with a higher ‘betweenness centrality’ and lower ‘farness’, whereas the markets in the East and Southeast Asian countries are on the fringe. Finally, the degree of globalisation for the world crude oil market is becoming further entrenched, verified by a decreasing normalised tree length; hence, its systemic risk may increase due to the future uncertainty of world politics.

Evolution of world crude oil market integration and diversification: A wavelet-based complex network perspective

Previous research on the crude oil market has focused on the constant degree of the market integration or diversification, ignoring the time-varying market integration and diversification during different typical stages of the global oil price volatility. This paper proposes a novel wavelet-based complex network method to investigate the evolution feature of the world crude oil market integration and diversification from the perspective of the interdependent structural relationship of global oil prices, so that two critical reference indexes, namely the reference decision-making cycle and the target regional market, will be proposed for decision makers to better adjust their strategies. The results show that the dominant evolution cycle of the market integration from the stable stage to the high shock stage is time-varying, featuring the weekly→weekly→short yearly→short quarterly→short monthly cycle, and the dominant evolution cycle of the market diversification is also time-varying, characterized by the short monthly→weekly→long yearly→weekly→weekly cycle. These findings provide a clearer reference decision-making cycle for decision makers to create a more efficient period-oriented strategy. Two larger stable homogeneous groups of regional oil markets and the dominant regional markets in the process of the market evolution are discovered, providing more details regarding the target monitoring regional market for the oil-related early warningstrategy and hedging strategies.

Volatility and efficiency of the world crude oil market

Purpose – The purpose of this paper is to examine volatility and the weak-form efficient market hypothesis (random walk) of world spot crude oil market. Design/methodology/approach – The study uses the generalized autoregressive conditional heteroskedasticity (GARCH-M), exponential generalized autoregressive conditional heteroskedasticity (EGARCH), and threshold GARCH (TGARCH) models. The data are selected from three markets: Dubai Vetch (DV), West Texas Intermediate, and Europe Brent Spot Price. Findings – The weak-form efficient market (random walk) hypothesis was rejected for all estimated GARCH-M, EGARCH, and TGARCH models, indicating that these markets are inefficient and predictable. For daily data, the empirical results showed the presence of asymmetric effects, and the conditional variance process was found to be highly persistent. Originality/value – This study is unique in its nature as it examines three markets on three continents. In addition, one of these markets (DV) was not carried out by the previous study. This work takes into account the market location.

The extreme-value dependence between the crude oil price and Chinese stock markets

This paper examines the asymptotic dependence between the Chinese stock market and the world crude oil market based on the Extreme Value Theory (EVT) and finds a positive extremal dependence. We explain this positive dependence in terms of economic cycles due to the co-movement between the Chinese stock market, the world oil market and the global economic cycle. EVT satisfactorily captures the Chinese special oil price adjustment mechanism. We also examine the contagion effect and find that the dependence level tends to increase dramatically during the crisis period but that the simultaneous booms between these two markets decrease considerably after the crisis.

Integration DATA Analysis between Chinese and the World Crude Oil Market

Integration DATA Analysis between Chinese and the World Crude Oil Market

The integration of China into the world crude oil market since 1998

The integration of China into the world oil market is an important issue for at least two reasons. First, the influence of the country on the world oil market is dependent on the level of the integration. Second, integration into the world oil market means that China is opening itself up to potential disturbances in the world market and this leads to significant energy security concerns for the country. The aim of this paper is to investigate whether or not China is an integral part of the world oil market. By reviewing the relevant trade and pricing policies of the Chinese government as well as the behavior of the Chinese national oil companies, we find that China is actively engaging itself in the world oil market. Our time-series results show that the Chinese oil price is cointegrated with the major oil prices in the world and a high degree of co-movement between the prices is found. Causality between the price pairs is found to be bi-directional in most cases. The empirical results suggest that China is now an integral part of the world oil market.

The market power of OPEC 1973–2001

We apply a multi-equation dynamic econometric model on monthly data to test if the behaviour of OPEC as a whole or different sub-groups of the cartel is consistent with the characteristics of dominant producers on the world crude oil market in the period 1973–2001. Our results indicate that the producers outside OPEC can be described as competitive producers, taking the oil price as given and maximizing profits. The OPEC members do not fit the behaviour of price-taking producers. Our findings of low residual demand price elasticities for OPEC underpin the potential market power of the producer group, and are in line with the results in some recent energy studies. On the other hand, our findings indicate that neither OPEC nor different sub-groups of the cartel can be characterized as a dominant producer in the period 1973–1994. However, we find that the characteristics of a dominant producer to some extent fit OPEC-Core as from 1994. Thus, although OPEC clearly has affected the market price, the producer group has not behaved as a pure profit-maximizing dominant producer.

Does OPEC influence crude oil prices? Testing for co-movements and causality between regional crude oil prices

Using high-frequency data the co-movements among crude oil prices are analysed in order to address the question of regionalization of the world crude oil market. Time-series econometrics in the form of error-correction modelling is applied for daily crude oil price data covering the time period 1988 to 2004 and in this framework topics like weak and strong exogeneity among three major oil prices – represented by Brent, OPEC and Texas (WTI) – are addressed. The empirical results are that causality is most likely bi-directional among these crude oil prices – and hence rejecting a regionalization hypothesis of the global oil market – and also an influence from the OPEC oil price towards Bent and WTI, which are usually claimed to have a benchmark role.