Derek W. Bunn
London Business School
Oil retains a fundamental position in global economic development, geopolitics and financial markets, as well as driving the energy commodities as a trading sector. Whether through direct links or sentiment spillover, oil prices are often key drivers of price movements in other markets. While this has been known for many years, patterns evolve and linkages may strengthen or weaken over time. The trading and business implications can often, therefore, be subtle, delicate and transitory. The first three papers in this issue relate directly to aspects of this theme, and the fourth does so indirectly in terms of decision making and risk management.
The paper by John Simpson, “Future spot gas prices in the US and the UK: are movements more influenced by country factors or by global factors?”, poses a question that could be paraphrased in terms of whether gas prices retain a strong international oil price link or whether they are evolving to more closely reflect the local supply-anddemand balances that exist in wholesale gas trading. The author presents evidence of the substantial decoupling of gas from oil in the US, but only partially in the UK. The latter case therefore still suggests interesting statistical arbitrage possibilities, particularly for positions over a couple of days.
In the subsequent paper, “Gasoline price volatility and presidential elections in the United States: a linear model approach”, Radin Ahmadian looks at a long time series from 1919 to 2009 and builds a model for predicting the price volatility of gasoline in the US. While it has often been suggested that outcomes of US presidential elections affect various sectors of the US economy, especially energy, the arguments have generally been based on anecdotal evidence. This study shows that a major part of price fluctuations over almost a century can be attributed to the variability of energy tax policy, critical domestic and international events, and the global crude oil market. The impact of election politics has been surprisingly small, although, to a limited extent, effects related to the transfer of power from one party to another and to whether the incumbent president was running for a second term were identified.
In the third paper, “High-frequency oil–foreign-exchange interdependence”, in contrast to the long horizons in the previous paper, Enzo Weber looks at the interaction of crude oil prices and euro–US dollar exchange rates, with a short-term focus on intraday market data. The existence and direction of causality between oil price and exchange rate shocks is complex, endogenous and evolutionary. This is therefore an important paper in terms of the methodological insights that advanced econometric modeling can bring to our understanding of these processes, and the significance of some of the results for high-frequency trading.
Finally, Achim Koberstein, Cormac Lucas, Christian Wolf and Dirk König look at gas markets from the perspective of large users and utilities and how they manage volume as well as price risk. In their paper, “Modeling and optimizing risk in the strategic gas-purchase planning problem of local distribution companies”, the authors present a two-stage stochastic linear programming model for strategic gas purchase with conditional value-at-risk considerations. They evaluate their approach using a real-world case study. This decision-support requirement continues to challenge most companies that are physically active in the liberalized gas markets, as well as software producers, and so the clarity of the approach in this paper should contribute substantially to decision making in practice.
Overall, this issue of the journal, which primarily focuses on the oil and gas markets, features an interesting and topical range of studies on price formation and linkages, all of which have practical implications for trading. As such they reflect well on the role of The Journal of Energy Markets in seeking to transfer advanced and innovative analyses into valuable applications.
Future spot gas prices in the US and the UK: are movements more influenced by country factors or by global factors?
Modeling and optimizing risk in the strategic gas-purchase planning problem of local distribution companies