INTEGRATION IN THE GLOBAL PRODUCTION OF ENERGY COMMODITIES

Neil A. Wilmot, University of Minnesota Duluth, (218) 726-7439,

Overview

Since the turn of the century, energy markets have experienced a number of shocks, particularly on the supply side. The rise of unconventional methods of production in the United States and the changing role of OPEC have impacted energy commodity markets. Early on, the financialization of commodity markets also played a role in the volatility observed in energy markets. The commingling of such events, over the last 15 years, could have impacts on the interconnectedness of global energy commoditiy markets. To investigate the degree of integration, in a global context, crude oil and natural gas production are examined. The presence and timing of structural breaks are examined for correlation to both the aforementioned shocks and additional global developments.

The hypothesis pertaining to the interconnectedness of global energy commodity markets dates to the early work of Adelman (1992), and continues today with the investigation of a ‘global pool’ hypotheses in oil markets [Gulen, 1999; and Wilmot, 2013] and natural gas markets [Siliverstovs et al, 2005; Neumann, 2009; Li et al, 2014]. Indeed, cross commodity relationships - between crude oil and natural gas markets – have recently been have recently been the subject of deeper scrutiny [Bachmeier and Griffen, 2006; Hartley et al, 2008; Brown and Yucel, 2009; Erdos, 2012]. The typical focus of such studies is on the univariate or bilateral properties of the commodities price series. Relatively few have examined the market characteristics utilizing data from the production of each commodity. A 2017 study, by Wilmot and Taivan (2017) uses production data, rather than the archetypal energy prices, to investigate the presence of bilateral relationships. Monthly, country level data for the U.S. and Canada, on crude oil and natural gas production, over the period 2002 through 2015, is examined. The results of standard unit root tests indicate the production series are nonstationary in levels, while cointegration test indicate that the markets are integrated. The current analysis seeks to move beyond the North America, bidirectional relationship, examining global market integration.

To investigate the interconnectedness of global energy commodity markets, panel unit root and panel cointegration methods are utilized. A key feature of the analysis is the investigation of the presence of structural breaks. It is now common knowledge that U.S. oil and natural gas markets have experienced a dramatic increase in production due to the advances in hydraulic fracturing and horizontal drilling. The timing of this shale revolution, would be expected to provide the context for a structural break, particularly for North American production. Additional supply and demand shocks experienced in other regions of the world may be the catalyst for further structural breaks.

Methods

To examine the degree of integration in global production of energy commodities, monthly production data, over the period 2000 – late 2016 is examined using panel unit root tests. Based on the results of the of the panel unit root tests, panel cointegrating methods are employed to examine the existence of a long-run equilibrium relationship among production in those countries under investigation. Panel cointegration tests without a structural break (Pedroni, 1999) are contrasted with those which allow for a structural break (Westerlund, 2006). Results are contrasted with those of a country-by-country analysis, and particular interest is paid to the determination and timing of structural breaks.

Results

While the project in ongoing, preliminary analysis suggests that energy commodity production is nonstationary.

Conclusions

This paper presents an empirical study of a global analysis of energy commodity production, using panel data methods. Particular interest is paid to the presence and timing of structural breaks in production. The results of such an analysis should be of interest to firms, policy makers, traders and energy industry participants.

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