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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
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    References listed on IDEAS

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    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.

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    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

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