CRUDE OIL MARKET RISK EVALUATIONS UNDER THE PRESENCE OF THE COVID-19 PANDEMIC

ABSTRACT

Due to the outbreak of Covid-19, crude oil demand fell significantly. The West Texas Intermediate (WTI) crude oil price turned negative for the first time in its history. Given the importance of crude oil as a natural resource and its intrinsic tie to the economy, the price fall may significantly impact crude oil participants. Even though the pandemic has become a new norm globally, crude oil price movements will assuredly remain a concern for crude oil participants. This study uses MATLAB software to model various conditional mean and variance models to address the impact of Covid-19 on WTI and Brent crude oil prices, forecasting returns and measuring potential Value at Risk and Expected Shortfall. Daily crude oil prices of WTI and Brent are obtained from the U.S. Energy Information Administration (EIA) and cover from 4 January 2010 to 30 July 2021. The study period is divided into two periods to study the impact of Covid19 on crude oil prices. The conditional mean and variance models are evaluated by the Box-Jenkins methodology. This study found that both WTI and Brent returns do not follow a normal distribution, and the GJR(1,1) with student-t distribution outperformed the GARCH and EGARCH models. The best fit model of WTI is MA(1)-GJR(1,1), while the best fit model of Brent is MA(2)-GJR(1,1). The results reveal the impact of Covid-19 on crude oil prices and show a higher standard deviation during Covid-19 than before Covid-19. The high GARCH value indicates that the volatility is highly persistent and clustering. The forecast results reveal that the volatility of WTI and Brent crude oil prices will continue to rise in the future. Risk determination for both WTI and Brent was conducted, and the potential losses of WTI are found to be greater than that of Brent.