IDEAS home Printed from https://ideas.repec.org/a/eco/journ2/2019-04-37.html
   My bibliography  Save this article

Determination of Causality in Prices of Crude Oil

Author

Listed:
  • Salman Sarwat

    (Barret Hodgson University, Karachi, Pakistan,)

  • Muhammad Kashif

    (Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, Karachi, Pakistan,)

  • Muhammad Aqil

    (Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, Karachi, Pakistan,)

  • Farhan Ahmed

    (NED University of Engineering and Technology, Karachi-Pakistan.)

Abstract

Price determination through demand and supply forces is the most efficient pricing mechanism. But, these forces should be real rather than artificial. Speculative trade creates artificial market forces, which bounds to disturb real economy. It is argued that the demand and supply forces are primarily driven by speculation rather than fundamentals in the presence of commodity derivatives. The aim of this study is to empirically test this argument through causality analyses. Crude oil and USA has been selected as a typical case. Daily spot prices of west texas intermediate crude oil and future prices from New York Mercantile Exchange from January 2nd, 1986 to March 6th, 2017 has been analyzed. Granger causality test and vector error correction model are applied to find out the causal relationship between spot and futures prices. Results show that causality runs from runs from crude oil futures to spot prices, crude oil is just one of the numerous commodities, , which are being speculatively traded through derivatives.

Suggested Citation

  • Salman Sarwat & Muhammad Kashif & Muhammad Aqil & Farhan Ahmed, 2019. "Determination of Causality in Prices of Crude Oil," International Journal of Energy Economics and Policy, Econjournals, vol. 9(4), pages 298-304.
    • Handle: RePEc:eco:journ2:2019-04-37
    as

    Download full text from publisher

    File URL: https://www.econjournals.com/index.php/ijeep/article/download/7724/4450
    Download Restriction: no
    File URL: https://www.econjournals.com/index.php/ijeep/article/view/7724/4450
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. repec:cup:cbooks:9781107034662 is not listed on IDEAS
    2. Brooks,Chris, 2014. "Introductory Econometrics for Finance," Cambridge Books, Cambridge University Press, number 9781107661455, December.
    3. repec:dau:papers:123456789/4237 is not listed on IDEAS
    4. Jing Quan, 1992. "Two‐step testing procedure for price discovery role of futures prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 12(2), pages 139-149, April.
    5. Alessandro Sterlacchini, 2020. "Trends and determinants of energy innovations: patents, environmental policies and oil prices," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 23(1), pages 49-66, January.
    6. Bekiros, Stelios D. & Diks, Cees G.H., 2008. "The relationship between crude oil spot and futures prices: Cointegration, linear and nonlinear causality," Energy Economics, Elsevier, vol. 30(5), pages 2673-2685, September.
    7. Imad A. Moosa, 2002. "Price Discovery and Risk Transfer in the Crude Oil Futures Market: Some Structural Time Series Evidence," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 31(1), pages 155-165, February.
    8. Ederington, Louis H. & Fernando, Chitru S. & Hoelscher, Seth A. & Lee, Thomas K. & Linn, Scott C., 2019. "A review of the evidence on the relation between crude oil prices and petroleum product prices," Journal of Commodity Markets, Elsevier, vol. 13(C), pages 1-15.
    9. Garbade, Kenneth D & Silber, William L, 1983. "Price Movements and Price Discovery in Futures and Cash Markets," The Review of Economics and Statistics, MIT Press, vol. 65(2), pages 289-297, May.
    10. Thomas V. Schwarz & Andrew C. Szakmary, 1994. "Price discovery in petroleum markets: Arbitrage, cointegration, and the time interval of analysis," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 14(2), pages 147-167, April.
    11. Kaufmann, Robert K. & Ullman, Ben, 2009. "Oil prices, speculation, and fundamentals: Interpreting causal relations among spot and futures prices," Energy Economics, Elsevier, vol. 31(4), pages 550-558, July.
    12. Julien Chevallier, 2010. "A Note on Cointegrating and Vector Autoregressive Relationships between CO2 allowances spot and futures prices," Economics Bulletin, AccessEcon, vol. 30(2), pages 1564-1584.
    13. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    14. Nikitopoulos, Christina Sklibosios & Squires, Matthew & Thorp, Susan & Yeung, Danny, 2017. "Determinants of the crude oil futures curve: Inventory, consumption and volatility," Journal of Banking & Finance, Elsevier, vol. 84(C), pages 53-67.
    15. Lee, Chien-Chiang & Zeng, Jhih-Hong, 2011. "Revisiting the relationship between spot and futures oil prices: Evidence from quantile cointegrating regression," Energy Economics, Elsevier, vol. 33(5), pages 924-935, September.
    16. Param Silvapulle & Imad A. Moosa, 1999. "The relationship between spot and futures prices: Evidence from the crude oil market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 19(2), pages 175-193, April.
    17. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    18. Imad A. Moosa & Nabeel E. Al‐Loughani, 1995. "The effectiveness of arbitrage and speculation in the crude oil futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 15(2), pages 167-186, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Godil, Danish Iqbal & Sarwat, Salman & Sharif, Arshian & Jermsittiparsert, Kittisak, 2020. "How oil prices, gold prices, uncertainty and risk impact Islamic and conventional stocks? Empirical evidence from QARDL technique," Resources Policy, Elsevier, vol. 66(C).
    2. Aviral Kumar Tiwari & Muhammad Tahir Suleman & Subhan Ullah & Muhammad Shahbaz, 2023. "Analyzing the connectedness between crude oil and petroleum products: Evidence from USA," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 2278-2347, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Balcilar, Mehmet & Gungor, Hasan & Hammoudeh, Shawkat, 2015. "The time-varying causality between spot and futures crude oil prices: A regime switching approach," International Review of Economics & Finance, Elsevier, vol. 40(C), pages 51-71.
    2. Xiaojie Xu, 2018. "Cointegration and price discovery in US corn cash and futures markets," Empirical Economics, Springer, vol. 55(4), pages 1889-1923, December.
    3. Shao, Ying-Hui & Yang, Yan-Hong & Shao, Hao-Lin & Stanley, H. Eugene, 2019. "Time-varying lead–lag structure between the crude oil spot and futures markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 523(C), pages 723-733.
    4. Joseph, Anto & Sisodia, Garima & Tiwari, Aviral Kumar, 2014. "A frequency domain causality investigation between futures and spot prices of Indian commodity markets," Economic Modelling, Elsevier, vol. 40(C), pages 250-258.
    5. Xianfang Su & Huiming Zhu & Xinxia Yang, 2019. "Heterogeneous Causal Relationships between Spot and Futures Oil Prices: Evidence from Quantile Causality Analysis," Sustainability, MDPI, vol. 11(5), pages 1-17, March.
    6. Raushan Kumar, 2017. "Price Discovery in Some Primary Commodity Markets in India," Economics Bulletin, AccessEcon, vol. 37(3), pages 1817-1829.
    7. Xu Xiaojie, 2018. "Linear and Nonlinear Causality between Corn Cash and Futures Prices," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 16(2), pages 1-16, November.
    8. Jena, Sangram Keshari & Tiwari, Aviral Kumar & Hammoudeh, Shawkat & Roubaud, David, 2019. "Distributional predictability between commodity spot and futures: Evidence from nonparametric causality-in-quantiles tests," Energy Economics, Elsevier, vol. 78(C), pages 615-628.
    9. Sebastian Nick, 2016. "The Informational Efficiency of European Natural Gas Hubs: Price Formation and Intertemporal Arbitrage," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    10. Miroslava Zavadska & Lucía Morales & Joseph Coughlan, 2018. "The Lead–Lag Relationship between Oil Futures and Spot Prices—A Literature Review," IJFS, MDPI, vol. 6(4), pages 1-22, October.
    11. Guglielmo Maria Caporale & Davide Ciferri & Alessandro Girardi, 2014. "Time-Varying Spot and Futures Oil Price Dynamics," Scottish Journal of Political Economy, Scottish Economic Society, vol. 61(1), pages 78-97, February.
    12. Shrestha, Keshab, 2014. "Price discovery in energy markets," Energy Economics, Elsevier, vol. 45(C), pages 229-233.
    13. Arfaoui, Mongi, 2018. "On the spot-futures relationship in crude-refined petroleum prices: New evidence from an ARDL bounds testing approach," Journal of Commodity Markets, Elsevier, vol. 11(C), pages 48-58.
    14. Asche, Frank & Misund, Bard & Oglend, Atle, 2015. "The Spot-Forward Relationship in the Atlantic Salmon Market," UiS Working Papers in Economics and Finance 2015/16, University of Stavanger.
    15. Lucia BALDI & Massimo PERI & Daniela VANDONE, 2011. "Spot and future prices of agricultural commodities: fundamentals and speculation," Departmental Working Papers 2011-03, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    16. Beckmann, Joscha & Belke, Ansgar & Czudaj, Robert, 2014. "Regime-dependent adjustment in energy spot and futures markets," Economic Modelling, Elsevier, vol. 40(C), pages 400-409.
    17. Pradita Nareswari & Sigit S. Wibowo, 2020. "Global and Local Commodity Prices: A Further Look at the Indonesian Agricultural Commodities," Capital Markets Review, Malaysian Finance Association, vol. 28(1), pages 65-76.
    18. Zhang, Yue-Jun & Wang, Zi-Yi, 2013. "Investigating the price discovery and risk transfer functions in the crude oil and gasoline futures markets: Some empirical evidence," Applied Energy, Elsevier, vol. 104(C), pages 220-228.
    19. Li, Miao & Xiong, Tao, 2021. "Dynamic price discovery in Chinese agricultural futures markets," Journal of Asian Economics, Elsevier, vol. 76(C).
    20. Miljkovic, Dragan & Goetz, Cole, 2020. "The effects of futures markets on oil spot price volatility in regional US markets," Applied Energy, Elsevier, vol. 273(C).

    More about this item

    Keywords

    Causality Analysis; Crude Oil Pricing; Futures; Spot Prices; Vector Error Correction Model;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D49 - Microeconomics - - Market Structure, Pricing, and Design - - - Other
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F01 - International Economics - - General - - - Global Outlook

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eco:journ2:2019-04-37. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ilhan Ozturk (email available below). General contact details of provider: http://www.econjournals.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.