Price dynamics of crude oil and the regional ethylene markets

Mansur Masih, Ibrahim Algahtani, Lurion De Mello

Research output: Contribution to journalArticleResearchpeer-review

Abstract

This paper is the first attempt to investigate: (i) is the crude oil (WTI) price significantly related to the regional ethylene prices in the Naphtha intensive ethylene markets of the Far East, North West Europe, and the Mediterranean? (ii) What drives the regional ethylene prices? The paper is motivated by the recent and growing debate on the lead-lag relationship between crude oil and ethylene prices. Our findings, based on the long-run structural modelling approach of Pesaran and Shin, and subject to the limitations of the study, tend to suggest: (i) crude oil (WTI) price is cointegrated with the regional ethylene prices (ii) our within-sample error-correction model results tend to indicate that although the ethylene prices in North West Europe and the Mediterranean were weakly endogenous, the Far East ethylene price was weakly exogenous both in the short and long term. These results are consistent, during most of the period under review (2000.1-2006.4) with the surge in demand for ethylene throughout the Far East, particularly in China and South Korea. However, during the post-sample forecast period as evidenced in our variance decompositions analysis, the emergence of WTI as a leading player as well, is consistent with the recent surge in WTI price (fuelled mainly, among others, by the strong hedging activities in the WTI futures/options and refining tightness) reflecting the growing importance of input cost in determining the dynamic interactions of input and product prices.

LanguageEnglish
Pages1435-1444
Number of pages10
JournalEnergy Economics
Volume32
Issue number6
DOIs
Publication statusPublished - Nov 2010

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Ethylene
Crude oil
Price dynamics
Naphthas
Error correction
Refining
Lead
Decomposition
Costs

Cite this

Masih, Mansur ; Algahtani, Ibrahim ; De Mello, Lurion. / Price dynamics of crude oil and the regional ethylene markets. In: Energy Economics. 2010 ; Vol. 32, No. 6. pp. 1435-1444.
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Price dynamics of crude oil and the regional ethylene markets. / Masih, Mansur; Algahtani, Ibrahim; De Mello, Lurion.

In: Energy Economics, Vol. 32, No. 6, 11.2010, p. 1435-1444.

Research output: Contribution to journalArticleResearchpeer-review

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