Cointegration Test

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March 2010, the synchronicity had been relatively strong and stayed near 1. But as the rolling correlation coefficient declined to around 0.8, synchronicity weakened. From March 2013 to December 2014, the rolling correlation coefficient declined dramatically, causing a decoupling of the two crude oil prices. Since January 2015, the synchronicity between Dubai and WTI has recovered.

Figure 3-7 shows the rolling correlation coefficients over a period of one year. Again, the prices of Dubai and Oman oils and Dubai and Brent are highly synchronized over the entire period. The changes in the correlation coefficient of Dubai and WTI prices over the one-year period are more gradual than those in the six-month period.

However, the entire period of the 12-month analysis is also divided into four segments, as was done for the six- month analysis. However, the time points of the first three of the four periods with different synchronicities start about one year later. From mid-2011 to 2014, the price of WTI shows the weakest synchronicity with the Dubai oil price, probably because U.S. crude oil production surged with the expansion of the country’s shale oil production.

37 Test statistics -1.53 (0.52) -1.837

(0.36) -1.81 (0.52) -1.49 (0.54) First differencing

test statistics

-50.10 (0.00)

-51.92 (0.00)

-52.45 (0.00)

-49.55 (0.00) Strong synchronicity period: 01/01/2007-4/30/2009

Test statistics -1.36 (0.6) -1.19 (0.68) -1.67 (0.45) -1.32 (0.62) First differencing

test statistics

-31.81 (0.00)

-32.68 (0.00)

-32.61 (0.00)

-31.43 (0.00) Weak synchronicity period: 05/01/2009-04/30/2013

Test statistics 0.14 (0.73) -0.50 (0.5) 0.14 (0.73) 0.21 (0.75) First differencing

test statistics

-29.24 (0.00)

-28.99 (0.00)

-31.01 (0.00)

-29.08 (0.00) Weakest and recovered synchronicity period: 05/01/2013-12/31/2014 Test statistics 2.55 (1.00) 2.43 (1.00) 2.41 (1.00) 2.55 (1.00) First differencing

test statistics

-13.00 (0.00)

-16.92 (0.00)

-15.38 (0.00)

-12.86 (0.00) Repetitive strong synchronicity and its maintenance: 01/01/2015-12/31/2016 Test statistics -1.67 (0.44) -1.86 (0.35) -1.89 (0.34) -1.65 (0.46) First differencing

test statistics

-21.62 (0.00)

-23.38 (0.00)

-23.04 (0.00)

-21.09 (0.00)

Table 3-4. Results of Johansen Cointegration Test (Entire Period) Type Eigenvalue Trace statistics Max-Eigenvalue

Dubai-WTI 0.03223 119.76 (0.00) 60.42 (0.00) Dubai-Brent 0.03887 120.52 (0.00) 68.44 (0.00) Dubai-Oman 0.04110 131.11 (0.00) 70.38 (0.00) Note: 1) Up to three lags are taken into account.

2) The null hypothesis is that the time-series prices of the two oil varieties do not have a

38 cointegration relation.

Table 3-5. Results of Johansen Cointegration Test (Four Sub-Divided Periods)

Periods Type Eigenvalue Trace

Statistics

Max- Eigenvalue

January 1, 2007 - April 30, 2009

Dubai-WTI 0.0129 14.24 (0.05) 13.63 (0.05) Dubai-Brent 0.0305 15.30 (0.05) 14.16 (0.05) Dubai-Oman 0.0422 23.12 (0.00) 21.85 (0.00)

May 1, 2009 - April 30, 2013

Dubai-WTI 0.0168 18.45 (0.09) 13.02 (0.08) Dubai-Brent 0.0277 26.84 (0.00) 22.68 (0.00) Dubai-Oman 0.0202 22.41 (0.00) 18.15 (0.01)

May 1, 2013 - December 31,

2014

Dubai-WTI 0.0273 10.91 (0.22) 8.91 (0.29) Dubai-Brent 0.0551 24.13 (0.00) 19.08 (0.01) Dubai-Oman 0.0519 30.00 (0.00) 20.10 (0.01)

January 1, 2015 - December 31,

2016

Dubai-WTI 0.0340 13.48 (0.10) 12.82 (0.09) Dubai-Brent 0.0605 25.17 (0.00) 23.96 (0.00) Dubai-Oman 0.0415 23.74 (0.00) 17.97 (0.01) Note: 1) Up to three lags are taken into account.

2) The null hypothesis is that the time series prices of the two oil varieties do not have a cointegration relation.

Despite the weak synchronicity period of Dubai and WTI prices, the Dubai-WTI cointegration relation is estimated to be significant for the entire period, for which there are two likely reasons. First, the period during which synchronicity was maintained is much longer than the period of weakest synchronicity (2011-2014), thus offsetting the period of non-synchronicity. Second, the non-synchronicity between the two varieties has been reflected to a very limited degree as it was measured on a daily basis over a 10-year period. Therefore, the cointegration test conducted for the divided periods examines the synchronicity between the crude oil varieties more closely.

As a result of the cointegration tests carried out on the relationships between Dubai oil and the other varieties over the four divided periods, which were segmented based on the changes in the one-year rolling correlation coefficients of the marker crude oils, the price of Dubai oil was found to have a cointegration relation with the

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prices of Brent and Oman oils at a significance level of 1 percent over all four periods (Table 3-5). However, the cointegration relation between Dubai and WTI is relatively weaker than those between Dubai and Brent or Oman.

The Dubai-WTI prices are found to have a cointegration relation with a significance level of 10% in the first and second periods, and the cointegration relation in the third period was not statistically significant, as the rolling correlation coefficients fell significantly. The cointegration relation between Dubai-WTI prices has recovered to a significance level of 10% since 2015.

4. Causality Between Prices of Marker Crude Oils

To identify causality between marker crude oil prices, the causalities between Dubai oil and other marker crude oils are analyzed. To this end, the granger-causality test is conducted based on the formula below.

Here, is the spot price of Dubai oil, and is the spot price of other marker crude oils. The prices of WTI, Brent, and Oman are input as , and the causality with the price of Dubai oil is estimated. Past prices up to five days before t-5 are taken into account.

For all six hypotheses, the results of the daily causality analysis between Dubai oil and other varieties over the 10-year period are shown in Table 3-6.

Table 3-6. Test of Causality Between the Prices of Dubai Oil and Other Marker Crude Oils

Lag_1 Lag_2 Lag_3 Lag_4 Lag_5

Ho: change in Dubai oil price does not cause change in WTI price

0.069 (0.79) 0.847 (0.43) 2.038 (0.11) 1.643 (0.16) 0.592 (0.71) Ho: change in WTI price does not cause change in Dubai oil price

2341.45 (0.00)

217.14 (0.00)

767.76 (0.00)

551.48

(0.00) 420.3 (0.00) Ho: change in Dubai oil price does not cause change in Brent price

2.717 (0.10) 1.914 (0.15) 1.935 (0.12) 1.298 (0.27) 0.521 (0.76) Ho: change in Dubai oil price does not cause change in Brent price

3745.98 (0.00)

2090.49 (0.00)

1351.55 (0.00)

1029.30 (0.00)

805.58 (0.00) Ho: change in Dubai oil price does not cause change in Oman oil price

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0.084 (0.77) 2.671 (0.07) 3.156 (0.02) 2.055 (0.08) 1.849 (0.10) Ho: change in Oman oil price does not cause change in Dubai oil price

13.100

(0.00) 8.009 (0.00) 7.259 (0.00) 5.104 (0.00) 4.684 (0.00) Note: The statistics are F-statistics, and the figures in ( ) are the significance levels.

As a result of the first and second hypothesis tests for examining causality between the prices of Dubai oil and WTI, it was found that change in the price of WTI causes change in the price of Dubai oil, but the reverse is not true. It was confirmed that the price of Dubai oil on any given day is influenced by changes in the price of WTI five days earlier (Lag_5). Therefore, besides the impact of the time gap between the United States and Singapore, the WTI price is deemed to have a significant influence on the Dubai oil price.

Like WTI, the Brent price is also found to have an influence on the price of Dubai oil. As seen in the hypothesis test results, the price of Dubai oil on any given day is influenced by changes in the price of Brent oil from one day (Lag_1) to five days (Lag_5) earlier at a significance level of one percent.

The last two hypotheses are for examining causality between Dubai and Oman oil. Change in the price of Oman oil causes change in the price of Dubai oil, but the reverse is not true. This suggests that the futures price of Oman oil traded on DME affects the spot price of Dubai oil as well as the pricing of Dubai oil by PRAs. In addition, this could be interpreted as meaning that, since Oman oil futures have been traded since 2007, the status of Oman oil has been raised.

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Chapter 4. Problems of the Asian Marker Crude Oil