Study on the impacts of Shanghai crude oil futures on global oil market and oil industry based on VECM and DAG models

Qi Zhang, Peng Di and Arash Farnoosh
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Qi Zhang: China University of Petroleum
Peng Di: China University of Petroleum, IFP School
Arash Farnoosh: IFP School

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Abstract: In the present study, the daily settlement data of Shanghai crude oil futures and world's major crude oils are selected. The role of Shanghai crude oil futures is studied regarding its pricing power and hedging risk. The dynamic relation analysis between Shanghai crude oil futures and international oil market is conducted by using rolling window causality test. The vector error correction model (VECM) and directed acyclic graph (DAG) are used to explore the long-term relationship and identify the contemporaneous causality structure respectively. Then Shanghai crude oil futures' impacts on other oil price fluctuations are analyzed by using variance decomposition method. The obtained analysis results show that the pricing power of Shanghai crude oil futures is limited compared with the international benchmark oil price, but it has begun to have a contemporaneous influence in the Asian oil market price transmission and better reflect oil supply and demand. Moreover, Shengli crude oil has stronger impact on the pricing mechanism after the listing of Shanghai crude oil futures. Furthermore, it also establishes an effective hedging tool for oil importers and refineries. Therefore, although the Shanghai crude oil futures is still in its initial development stage at present, it provides an important basis for becoming a regional benchmark in Asia and a useful instrument for energy market participants, influencing China's oil industry in import price and consumption.

Keywords: Shanghai crude oil futures; price transmission; vector error correction model; directed acyclic graph; hedging risk (search for similar items in EconPapers)
Date: 2021-05-15
New Economics Papers: this item is included in nep-ene, nep-isf and nep-rmg
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Published in Energy, 2021, 223, pp.120050. ⟨10.1016/j.energy.2021.120050⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03151102

DOI: 10.1016/j.energy.2021.120050

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