Effect of Fluctuation of Crude oil prices on Sectors like Automobile, Natural Oil & Gas,

Metal & Mining, Technology and Energy in India

We used CRUDE OIL to find if there is any dependability on it.
The Other Sector Indices we used to find the relationship are as follows:
AUTO INDEX
ENERGY INDEX
IT INDEX
METAL INDEX
NATURAL OIL & GAS

Objectives of the Study

1. To examine the relationship and causality of Crude Oil with other Sector Indices.

Timeframe of the study

We consider the time frame from January 2015 to June 2022. We try to do a comparative
analysis by considering 3 different subsets of the above-mentioned timeframe.
1. Jan 2015 to June 2022.
2. Jan 2015 to Dec 2019
3. Jan 2020 to June 2022
The time-period from Jan 2015 to Dec 2019 refers to the pre-covid period while the time-
period from Jan 2020 to June 2022 refers to the covid period.

Data Source and Time frequency:

The data for all the indices have been collected from Bloomberg database and the time
frequency considered is weekly.

The time plot of all the Indices is represented in Figure 1

 40000 140
CrudeOil (left)
AutoIndex (left)
EnergyIndex (left)
ITIndex (left)
35000
MetalIndex (left)
NaturalOilGas (right) 120

30000

100
25000

20000 80

15000
60

10000

40
5000

0 20
2015 2016 2017 2018 2019 2020 2021 2022

Figure 1

Descriptive Statistics:

Ex. Jarque-
Variable Mean Minimum Maximum Std. Dev. Skewness
kurtosis Bera Test

Crude Oil 3959.6 1294.0 9423.8 1381.3 1.6153 3.2643 344.513***

Auto Index 9284.6 4517.8 12010 1513.9 -0.28298 -0.54002 9.99475***
Energy Index 14288 7360.9 28878 4899.2 0.79319 0.22976 41.9667***
IT Index 16869 9434.6 38827 7885.0 1.3621 0.58520 126.804***
Metal Index 3214.0 1495.6 6755.6 1220.7 1.0156 0.22039 68.1821***
Natural Oil & Gas 69.082 32.739 135.89 26.314 0.95885 -0.38335 62.4670***
* Significant at the 10% level; ** Significant at the 5% level; *** Significant at the 1% level

As expected, none of the series is normally distributed.

Stationarity Test at Levels and 1st Difference:

ADF
1st Order of
Variable Levels Difference Integration
Crude Oil -1.4322 -9.65396*** I(1)
Auto Index -1.64115 -18.9279*** I(1)
Energy Index -2.12093 -12.7666*** I(1)
IT Index -2.84807 -2.07635 I(1)
Metal Index -1.8457 -5.35035*** I(1)
Natural Oil & Gas -0.826993 -20.2027*** I(1)
*** Denotes the rejection of the null hypothesis at 1%level of significance

As per the ADF test all the series are non-stationary at level. IT Index series is not stationary at 1 st
difference, Rest of the series are stationary at the 1st difference.

Long Term Relationship

We use the Engle-Grander Cointegration test to evaluate the long-term relationship between
the variables.
Test Results of Cointegration Test (Engle-Granger)
Dependent Variable Independent Variable Lag-order Tau-Statistics p-value

Crude Oil Auto Index 5 0.856133 -0.9246

Auto Index Crude Oil 5 -2.14621 0.4514

Crude Oil Energy Index 6 -2.26727 0.3893

Energy Index Crude Oil 6 -2.37365 0.3371

Crude Oil IT Index 16 -1.73054 0.6639

IT Index Crude Oil 16 -2.13148 0.4591

Crude Oil Metal Index 19 -2.27358 0.3861

Metal Index Crude Oil 19 -2.7453 0.1837

Crude Oil Natural Oil & Gas 1 -0.248614 0.9779

Natural Oil & Gas Crude Oil 1 -1.81633 0.6223

The test results suggest that Crude Oil and Other Sector Index series are not cointegrated.
Short Run Relationship
We use the Granger Causality Test to evaluate the short run relationship between the
variables (taking two variables at a time)

1. Time line - January, 2015 – June, 2022

The results of the Granger Causality test are provided in the following table (SAMPLE):
Null Hypothesis F-Value Result (for 5%)

Crude Oil does not Granger Causes Auto Index 1.883608* Accept

Auto Index does not Granger Causes Crude Oil 4.705046*** Reject

Crude Oil does not Granger Causes Energy Index 0.874212 Accept

Energy Index does not Granger Causes Crude Oil 3.7342237*** Reject

Crude Oil does not Granger Causes IT Index NA NA

IT Index does not Granger Causes Crude Oil NA NA

Crude Oil does not Granger Causes Metal Index 3.350204*** Reject

Metal Index does not Granger Causes Crude Oil 2.131456*** Reject

Crude Oil does not Granger Causes Natural Oil & Gas 0.692054 Accept

Natural Oil & Gas does not Granger Causes Crude Oil 3.708093*** Reject

***Significant at 1%, **Significant at 5%, *Significant at 10%

The appropriate lag length has been determined using Akaike Information Criteria.

The direction of the causalities is shown below:

Crude Oil Auto Index
Crude Oil Energy Index
Crude Oil Metal Index
Crude Oil Natural Oil & Gas
 2. Time line - January, 2015 – December, 2019

The results of the Granger Causality test are provided in the following table (SAMPLE):
Null Hypothesis F-Value Result (for 5%)

Crude Oil does not Granger Causes Auto Index 0.630471 Accept

Auto Index does not Granger Causes Crude Oil 2.554275* Accept

Crude Oil does not Granger Causes Energy Index 2.873655* Accept

Energy Index does not Granger Causes Crude Oil 3.965293** Reject

Crude Oil does not Granger Causes IT Index NA NA

IT Index does not Granger Causes Crude Oil NA NA

Crude Oil does not Granger Causes Metal Index 1.276801 Accept

Metal Index does not Granger Causes Crude Oil 2.724531* Accept

Crude Oil does not Granger Causes Natural Oil & Gas 0.603299 Accept

Natural Oil & Gas does not Granger Causes Crude Oil 2.536844* Accept

***Significant at 1%, **Significant at 5%, *Significant at 10%

The appropriate lag length has been determined using Akaike Information Criteria.

The direction of the causalities is shown below:

Crude Oil Auto Index

Crude Oil Energy Index

Crude Oil Metal Index
Crude Oil Natural Oil & Gas
 3. Time line - January, 2020 – June, 2022

The results of the Granger Causality test are provided in the following table (SAMPLE):
Null Hypothesis F-Value Result (for 5%)

Crude Oil does not Granger Causes Auto Index 1.693477 Accept

Auto Index does not Granger Causes Crude Oil 2.043520* Accept

Crude Oil does not Granger Causes Energy Index 0.606250 Accept

Energy Index does not Granger Causes Crude Oil 0.042374 Accept

Crude Oil does not Granger Causes IT Index NA NA

IT Index does not Granger Causes Crude Oil NA NA

Crude Oil does not Granger Causes Metal Index 1.593172 Accept

Metal Index does not Granger Causes Crude Oil 1.924272*** Reject

Crude Oil does not Granger Causes Natural Oil & Gas 0.667877 Accept

Natural Oil & Gas does not Granger Causes Crude Oil 2.015300 Accept

***Significant at 1%, **Significant at 5%, *Significant at 10%

The appropriate lag length has been determined using Akaike Information Criteria.

The direction of the causalities is shown below:

Crude Oil Auto Index
Crude Oil Energy Index
Crude Oil Metal Index
Crude Oil Natural Oil & Gas
Impulse Responses:

response of d_AutoIndex to a shock in d_CrudeOil

50

40

30

20

10

-10

-20
0 2 4 6 8 10
weeks

response of d_EnergyIndex to a shock in d_CrudeOil

80

70

60

50

40

30

20

10

-10
0 2 4 6 8 10
weeks
 response of d_CrudeOil to a shock in d_MetalIndex
30

25

20

15

10

-5

-10

-15
0 2 4 6 8 10
weeks

response of d_NaturalOilGas to a shock in d_CrudeOil

0.6

0.5

0.4

0.3

0.2

0.1

-0.1
0 2 4 6 8 10
weeks
Implications:
This study is done to find out any type of relationship between Crude Oil prices and
Prices of Sectorial indexes of Nifty like Auto, Energy, IT, Metal, Natural Oil & Gas by using
Cointegration and Causality test. We can also see that the IT index is not stationary in levels
and even in first difference. So, we can’t prove any type of relationship between IT index and
any other variables.
The results of Cointegration test show that there is no long-run relationship between
Crude Oil Price and Sectorial indexes. From the cointegration test we can see that the Crude
oil prices don’t have significant influence on the Sectorial indexes in the long-term. So,
investors who are into long-term trading shouldn’t think about short-term fluctuation in prices
of crude oil.
From the Granger causality test for the whole time-period we can see that there is a
causal relation from Auto index, Energy index, Natural Oil & Gas to Crude Oil Price & Crude
Oil to Metal index price. So, if an investor wants to invest in Crude oil for short term, then
they should take into account these three sectorial indexes. And if anyone want to invest in
Metal index, they should take Crude oil price into account before short term investment. If we
want to see the causal relation between Crude oil and sectorial index before Covid-19 period
and during Covid period, we can clearly see that there is causal relation from Energy index to
Crude oil before covid period & from Metal index to Crude oil during pandemic. So, If any
investor want to invest into crude oil after 2020 for short-term they can see the behaviour of
Metal index first.
From the Impulse response we can see that if there is sudden fluctuation in Auto Index,
Energy Index & Natural Oil & Gas, there is a sudden change in Crude Oil in the 1 st day but
with time it will dies down at day 10 and there will be no effect. If there is sudden change in
Crude oil, then Metal index will fluctuate for some time and it will go up for 25% in the day
10.