Interpreting the movement of oil prices: Driven by fundamentals or bubbles?

Based on the historical data of crude oil, diesel and gasoline markets during November 2001–December 2015, this paper employs the state-space model and log-periodic power law (LPPL) model to explore the dynamic bubbles of oil prices and predict their crash time. The results indicate that, first, oil price bubbles only exist during November 2001–July 2008, and crude oil and diesel prices are significantly driven by bubbles, whereas gasoline prices are mainly driven by fundamentals. Second, the state-space model captures the time-varying bubbles of crude oil and diesel prices. Finally, the LPPL model well predicts the crash time of bubbles.     

Petroleum spreads and the term structure of futures prices

We employ the term structure of gasoline and heating oil prices, proxied by convenience yields, to explain the variation in the spread between the prices of gasoline and crude oil and the prices of heating oil and crude oil. We demonstrate that the marginal convenience yields in the gasoline and heating oil markets explained much of the variation in the spreads between 1986 and 1999. The evidence indicates the importance of a disaggregated treatment of the term structure of prices: the convenience yield is found to explain a substantially higher amount of the variation in the spread when it is decomposed by maturity, even after controls for seasonality and inventory levels are implemented. These findings support the notion that the futures term structure contains information beyond what can be garnered via obvious or easily available proxies of current supply and demand. The findings are also supported in an alternate specification that tests for the origins of information spillover (leadership) between the commodities: it is demonstrated that decomposed convenience yields explain a substantial portion of the volatility spillover from the gasoline and heating oil markets to the crude market.     

Correlated jumps in crude oil and gasoline during the Gulf War

This article employs a bivariate poisson jump model to investigate the relationship between the volatility of crude oil and gasoline especially during the period of the Gulf War. We find that greater jumps occurring in crude oil returns will appear in gasoline returns at the same time, but the magnitude of the co-movements in volatility falls. The covariance is relatively smaller in the Second Gulf War vs. the first conflict. The volatility of crude oil is of significantly high levels during periods of the war, yet the volatility of gasoline is not as sensitive as crude oil, particularly in the second conflict. Furthermore, the jump that occurred by the war did not lead both spot prices to a high persistent level for a long period, which fits the feature of the jump models. All these findings are important to market traders and hedging strategies.     

Asymmetric evidence of gasoline price responses in France: A Markov-switching approach

It has been documented that retail gasoline prices respond more quickly to increases in wholesale prices than they do to decreases in wholesale prices. However, there is little empirical evidence that identifies the link between the pass-through of oil prices to gasoline in different volatility regimes. Using a Markov-switching model on weekly observations of fuel prices from 1990 to 2011, we find that fuel prices respond significantly faster to increases in crude oil prices than to decreases in crude oil prices. However, when volatility is low, the transmittal of a price change from crude oil to retail fuel is higher compared to periods of high volatility. These results provide important information on the behavior of retailers. The findings of this paper therefore provide clues for better understanding the recent dynamics of fuel prices and some policy implications.     

Stability of Canadian refinery response to petroleum product prices

The proportion of gasoline in a barrel of crude oil varies in response to changes in relative product prices. This response is found to be significant and stable using the Cooley—Prescott varying parameter technique on Canadian data for 1956–77. When the price of gasoline increases by 1% its share increases by 0.28%. Kerosene and gasoline are found to be substitutes in production while gasoline and residual fuel oil are found to be complements. The US has a different response function with heavier rather than lighter products as substitutes for gasoline in the production process. These variations are attributed to differences in energy product markets and government policies.     

Petrol prices,oil price rises and oil price falls: some evidence for the UK since 1972

This paper examines the relationship between retail petrol prices, excise duties and crude oil prices in the UK over the period 1973–1988. The existence of a stable relationship between the petrol price, level of excise duty and spot oil price is confirmed through use of the cointegration approach. Although the speed of reaction of petrol prices to changes in the crude price depends on whether crude prices are rising or falling, any asymmetry in the pricing response is virtually absent after an adjustment period of only four months.     

Rockets and feathers meet markup margins: Applications to the oil and gasoline industry

This article investigates the existence of asymmetric price transmission between crude oil, rack (wholesale) and retail gasoline prices. A threshold cointegration technique is used, with regime switches being triggered by the size of the markup margin. There is consistent evidence of band‐TAR in which the crude, rack and retail prices are free to diverge until the markup margin is squeezed or stretched beyond a lower or upper critical threshold. This finding indicates that abnormally high markup margins cannot be sustained, which provides evidence against market power exertion. The threshold error correction models indicate that there is no systematic relationship between the speed of adjustment back to the long‐run relationship and the markup margin, which rules out the existence of “rockets and feathers.”     

Do net positions in the futures market cause spot prices of crude oil?

The last decade has witnessed sharp increases in the price of crude oil. There are two possible explanations for these increases: dramatic increases in financial firms' position in the oil futures market and recent increases in oil prices from changes in economic fundamentals. This paper examines the causal relationship between the net financial position and the crude oil price by using three types of Granger non-causality tests: the classical Granger non-causality test, a robust Granger non-causality test and a Granger non-causality test in quantiles. The empirical results provide some evidence of causality from the net financial position to the spot price of crude oil. In addition, futures prices serve as a transmission mechanism underlying the causal relationship between the net financial position and the crude oil price.     

Refinery mix in the U.S., Canada,and the E.E.C.

This paper examines the response of gasoline's share of a barrel of crude oil to changes in relative petroleum product prices. An inter-country comparison of the U.S., Canada, and the E.E.C. allows investigation of different parts of the production possibility frontier. In the U.S. and Canada, with relatively large amounts of cracking capacity, there is price responsiveness of the product mix to changes in relative product prices. In the U.S., both residual and distillates are substitutes in production for gasoline, but for Canada, only distillate is a substitute. Part of this difference is attributed to the U.S. oil quota. For the E.E.C. with relatively small amounts of cracking capacity there was no discernible effect of product prices on product mix.     

Rockets and feathers behaviour in the Spanish gasoline and diesel market: New evidence

In this paper we analyse the potential asymmetric response of retail prices for gasoline and diesel‐fuel to changes in oil prices for the Spanish economy and its relation with the so‐called ‘rockets and feathers’ behaviour. We show that the assumption made by previous studies, which use as the key explanatory variable the sign –positive or negative‐ of the change in international oil prices, is inadequate for the Spanish case and the magnitude of the change in international oil prices is also relevant. For small changes in international oil prices there is neither price asymmetry nor rockets and feathers behavior in the retail markets. However, price asymmetries in line with rockets and feathers behavior in retail gasoline and gasoil markets are present when these changes exceed a certain threshold. Following Martín‐Moreno et al. (2018) we first apply an Auto‐regressive Error Correction Model and endogenously estimate the threshold triggering the rockets and feathers behaviour. A time‐varying nature for the dynamic response of retail prices to oil price shocks is revealed when we estimate the TAR‐ECM model using rolling windows. Hence, in a second stage, we use a Markov‐switching estimation of the model to test the robustness of the results given its suitability to changing environments. This study could have relevant policy implications for the Spanish gasoline and gasoil retail markets due to the ongoing debate on the existence of a rockets and feathers behavior in gasoline and gasoil retail markets between the Spanish regulatory body and the oil companies.     

The determinants of retail petrol prices in Greece

The purpose of this article is to examine the relationship between retail prices of petrol, international oil prices and tax rates in Greece. We examine not only the hypothesis that retail prices act asymmetrically to crude oil price changes and the pass-through rates of tax increases, but also use the cross-sectional dimension of the data to explore whether the existence or otherwise of market power affects retail prices. Our results provide little evidence for asymmetric behaviour. However, the degree to which prices overreact to tax changes and the significance of market power across the different regions suggests that the market for petrol/diesel is not very competitive.     

India’s petroleum demand: estimations and projections

Energy security is crucial for sustaining high economic growth in India. This article empirically estimates India’s long- and short-term demand relations for crude oil, diesel and petrol (gasoline) using the ARDL and ECM cointegration procedures and then uses them to project demand for these products up to 2025 under various scenarios of GDP growth and oil prices. Our projections show that over 2012 to 2025, demand is likely to increase by about 74% for crude oil, 117% for diesel and 136% for petrol – the annual growth rates being about 4.3% for crude oil, 6.1% for diesel and 6.8% for petrol (gasoline). This article suggests that India needs to (1) take measures to improve efficiency in the use of petroleum products; (2) try to enhance supplies such as through production sharing agreements by Indian oil companies with other countries and (3) increase the use of nuclear, hydro, solar and other alternative energy sources, as Western European countries have done.     

Oil price risk in the Spanish stock market: An industry perspective

This study examines the sensitivity of the Spanish stock market at the industry level to movements in oil prices over the period 1993–2010, paying special attention to the presence of endogenously determined structural changes in the relationship between oil price changes and industry equity returns. The empirical results show that the degree of oil price exposure of Spanish industries is rather limited, although significant differences are found across industries. The oil price sensitivity is very weak in the 1990s, a period of fairly stable and low oil prices. Instead, the link between crude oil and stock prices seems to have increased during the 2000s, becoming primarily positive. This evidence highlights the key role played by aggregate demand-side oil price shocks associated with the global real economic activity in the link between oil price fluctuations and the Spanish stock market.     

The relationship between agricultural commodity prices,crude oil prices and US dollar exchange rates: a panel VAR approach and causality analysis

This study examines the relationship between crude oil prices, US dollar exchange rates and 30 selected international agricultural prices and five international fertilizer prices in a panel framework. The study uses panel VAR methods and Granger causality tests on panel data sets of agricultural commodity prices (as well as specific agricultural commodity sub-groups) and fertilizer prices with monthly observations of the period from June 1983 to June 2013. The empirical results of the present study indicate that crude oil prices as well as US dollar exchange rates affect international agricultural commodity and fertilizer prices. Furthermore, contrary to the findings of several studies in the literature, the present study supports bidirectional panel causality effects between crude oil prices and international agricultural prices as well as between US exchange rates and international agricultural prices.     

Price transmission and local market power: empirical evidence from the Austrian gasoline market

We analyse the impact of local market power on price margins and different dimensions of price adjustment dynamics (speed and asymmetry of price transmission) using data for a large number of individual gasoline stations in Austria. Specific attention is paid to threshold effects in price adjustment. Our results clearly suggest that the speed of price transmission between the Brent crude oil index and retail diesel prices is higher in a more competitive environment. While evidence on the relationship between local market power and asymmetries in the speed of price adjustment is mixed, our findings regarding asymmetries in price thresholds are clear: in regions where competition from neighbouring rivals is weak and/or consumers’ price elasticity of demand is low (stations located on the highway), positive thresholds significantly exceed negative ones, which corresponds to the ‘rockets and feathers phenomenon’. As expected, we observe that prices are lower in more competitive local markets.     

An investigation into the dynamic relationship between international and China’s crude oil prices

This article studies the dynamic relationship between international (WTI, Brent and Dubai) and domestic (Da Qing) crude oil prices in China using threshold cointegration method. We find evidence of a long-run equilibrium relationship between each pair of international and Da Qing oil prices, favouring the market integration hypothesis. We also estimate asymmetric adjustments under the momentum threshold autoregressive (M-TAR) specification in a TVECM, and the results show that adjustments to eliminate disequilibrium happen faster when oil price spread increases than when it decreases. The long-run and short-run Granger causality tests support the notion that China has influence on the international oil markets. The results imply that China should open up its domestic and imported oil markets, and also establish a well-functioning crude oil futures market, as they are essential for arbitrage and hedging strategies.     

Multifractal detrended cross-correlations between WTI crude oil price fluctuations and investor fear gauges

This article investigates the cross-correlations between WTI crude oil prices and fear gauges using cross-correlation statistic test and multifractal detrended cross-correlation analysis. The results show that the cross-correlations between crude oil prices and three different kinds of fear gauges are multifractal. By finding the ‘crossover’, we separate the three pairs of time series into the short term and long term, and find that cross-correlations of small fluctuations are persistent in the short and long terms, cross-correlations of large fluctuations are strongly anti-persistent in the short and long terms. The relationship is useful to profit in future markets.     

Testing for Temporal Asymmetry in the Price‐Volume Relationship

This paper presents some evidence for the presence of temporal asymmetry in the price-volume relationship in the crude oil futures market. By using threshold models we show that there is bidirectional causality between volume and prices, whereas the conventional model that assumes symmetry can only detect unidirectional causality. The results also show that the price-volume relationship is asymmetric, in the sense that negative price and volume changes have stronger effects (on each other) than positive changes. Some explanations for asymmetry in the price-volume relationship are suggested.     

Competition and petrol pricing in the smartphone era: Evidence from Singapore

This paper examines how pre-tax petrol and diesel prices in Singapore respond to changes in crude oil prices using an asymmetric error correction model. We pay particular attention to the effect increased use of smartphones may have had in altering the pattern of price adjustment as consumers become more informed about fuel prices and as search costs decline. The results suggest that increases in the use of smartphones and tablets have increased the estimated short-term response rate but only for the adjustment of retail prices to decreases in crude oil prices. We find no evidence of a smartphone effect for wholesale prices indicative of the different roles played by consumers in competition.