Investigation of the Impact of Dubai and Oman Crude Oil Market Structure on Iranian Crude Oil in the Asian Market

اقتصاد و توسعه منطقه ای

Article 3, Volume 30, Issue 26, February 2024, Pages 58-86   

Document Type: Original Article

DOI: 10.22067/erd.2023.79779.1152

Authors

Seyyed Abdollah Razavi^{* 1}; Mohammad Bagher Bayat²

¹Associate Professor, Department of Energy Economics and Management, Petroleum University of Technology, Tehran Faculty of Petroleum, Tehran, Iran.

²Ph. D Student of Management of Oil and Gas Contracts, Department Economic Law, Allame Tabatabaee University, Tehran, Iran.

Abstract

 
1- INTRODUCTION
Financial markets and oil exchanges and their expectations play a major role in understanding oil price changes. To analyze and understand how crude oil prices change, it is important to pay attention to these markets. In IRAN, the International Deputy of National Oil Company determines the price of Iranian oil by using different pricing methods and mechanisms. One of the factors they use for pricing is the price of oil in the FOB Persian Gulf region, including the oil price of Dubai and Oman oil exchanges.
The current pricing models of Iran's crude oil prices in the East Asian market have not yet taken into account the role of stock exchanges and capital markets in price calculations. Current method of determination of the price of Iranian crude oil in Asia, it uses the price of index oil in the physical market and the price of index oil in the stock market of that region. This article examines the impact of the financial layers of the Dubai crude oil market on the price of Iranian crude oil and the extent to which the behavior of the price of Iranian crude oil in the Asian market affects the financial markets of Asia such as the Dubai Stock Exchange.
 
2- THEORETICAL FRAMEWORK
The Asian oil market is one of the largest markets in the world and the largest oil customers such as China, India, etc. are located in this region. Also, this market is one of the largest customers even in the condition of Iran's oil embargo, so investigating various financial factors and market structure of competitive and leading crude oil in the Asian market is one of the important issues in maintaining the country's oil market. If the country's oil price formula is developed based on the oil considerations of other competitors, it will have the characteristic of being competitive with other producers in this region. On the other hand, maintaining the market share in the Asian market depends on the price formula that takes into account the most considerations of the capital market (stocks in this region) along with the fluctuations in the price of crude oil indicators in this market.
 
3- METHODOLOGY
In this research, the multivariate GARCH method and daily time series data of 2010-2019 are used to investigate the impact of the financial structure of the Asian oil market on the price of Iranian oil.
 
4- RESULTS & DISCUSSION
The price of Iranian crude oil in the Asian market is dependent on the financial markets of Dubai index crude oil, and as expected, using the Brent market structure in the ICE exchange for the pricing of Iranian crude oil in the Asian market gives a wrong signal because the European crude oil exchange market has a significant effect on the price of crude oil. Iran has no market in the East and this is despite what is usually said in academic societies. On the other hand, due to the regional nature of the oil market, the price of regional crude oil influences the Iranian oil market, and the stock market has a regional effect on the price of crude oil.
 
5- CONCLUSIONS & SUGGESTIONS
In this research, three markets were examined; the Oil market, the Tokyo stock market and the Iranian crude oil market in the East Asia region. First, a shock is created in the stock market. With the effect of policy changes, market expectations are changed and price shocks are created in the stock market. The effect of turbulence in one market is transferred to other markets. Every shock in one market creates a positive impulse in another market. In other words, if the fluctuations in the futures market (Dubai Stock Exchange) increase, the price of Iranian crude oil will also increase in the market and have a positive effect on the fluctuations.
Based on the findings of this research, it can be stated that oil exchanges play an important, influential and positive role in determining the price of Iranian crude oil, and any fluctuation in the market structure of oil exchanges will cause fluctuations in the price of Iranian crude oil. Also, the price of Iranian crude oil in the Asian market is a function of the structure of the oil market (contango or backward).
The Ministry of Petroleum, especially the international affairs of the National Iranian Oil Company, should pay attention to the developments of the oil market regionally, the connection of the capital and futures markets in crude oil pricing, oil sales negotiations, marketing and conclusion of oil sales contracts. Also, it is suggested to modify the traditional pricing models in the Asian market in such a way that in the oil pricing formulas in the Asian market, especially the changes in the future prices of the index crude oil of this region and its stock market and the financial structure of the oil market of Dubai and Oman are also taken into account.  Also, in the pricing formula of Iranian oil in the Asian market, in addition to the role of Saudi Arabia as a competitor, use the variables of the model used in the current article. It is also suggested that the international affairs of the National Oil Company pay attention to futures contract transactions in paper exchanges in this Asian market to cover the risk caused by crude oil price fluctuations. In short-term and long-term budget planning of the government should pay attention to the relationship between capital markets and oil futures with the oil market, especially in this region; have such models and use them in their policies. The central bank of IRAN also has models to explain the behavior of crude oil prices in the market so that it can control the currency fluctuations that are mainly caused by the fluctuations of the financial markets and the oil market. The Budget Management and Planning Organization needs to estimate the price of crude oil in the annual budget to calculate the country's annual income, and also to implement development plans, it is necessary to estimate oil revenues and oil prices. Based on the analysis of financial factors, they can have a more correct analysis of the price of oil.
For further studies, other target markets for the sale of crude oil (including the Mediterranean and North American markets) and other grades of Iranian crude oil in those markets can be examined. It is better to use other econometric methods, for example, IGARCH, ARFIMA and FIGARCH methods for estimation. In the same way, I suggest that in the next studies, the interest rate and the dollar rate, as well as the effects of other stock exchanges, should be considered as a variable, and the effect of other economic indicators should be investigated, and other non-oil stock market items can also be added to the model and be checked

Keywords

Iranian Crude Ooil; Asian Market; Dubai Crude Oil; Nikkei Index; Oman Crude Oil; Brent Oil; Brent Spot Price; Brent Future Price; Contango and Backward Structure

References

Abosedra, S., & Radchenko, S. (2003). Oil Stock Management and Futures Prices: An Empirical Analysis. Journal of Energy and Development. 28)2(, 88-173.

Adelman, M. A. (1982). OPEC as a cartel, in Griffin. J. M. and Teece, D. (eds). OPEC behavior and World Oil Prices: London.

Ahmadian, M. (1999). Theoretical and Applied Economics of Oil, Tehran:
Tarbiat Modares University. (In Persian)

Arouri, M., & Nguyen, D.K. (2010). Oil prices, Stock markets and portfolio investment: evidence from sector analysis in europe over the last decade. Energy policy. 38, 4528-4539.

Balabanoff, Stefan (1995). "Oil Futures Prices and Stock Management: A Cointegration Analysis". Energy Economics, 17(3), 205-10.

Barsky, R. & Lawrence, S. (1988). Gibsons Paradox and the Gold Standard. Journal of Political Economy. 96(3), 528-550.

Beki Haskoi, M., & Khajund, F (2013). Forecasting oil futures market fluctuations using Garch models and Markov Garch regime change model, Scientific Research Quarterly of Financial Knowledge of Securities Analysis, 7(23), 85-108. (In Persian)

Bernanke, B.; Laubach, T.; Mishkin, M., & Posen, A. (1999). Inflation Targeting: Lessons from the International Experience. Princeton University Press: Princeton NJ.

Bessimbinder, H. (1993). An Empirical Analysis of Risk Premia in Futures Markets. The Journal of Futures Markets; 13(6), 1986-1998.

Bordo, M. D., & Schwartz, A. J. (1994). The Specie Standard as A Contingent Rule: Some Evidence for Core and Peripheral Countries, 1880-90., Working Paper, No. 1994-11, Rutgers University, Department of Economics, New Brunswick, NJ

Breeden, Douglas. (1980). "Consumption Risks in Futures Markets". Journal of Finance, 35, 503-20.

Brenner, R., & Kroner, K. (1995). Arbitrage, Cointegration, and Testing Unbiasedness Hypothesis in Financial Markets. Journal of finance and Quantitative Analysis 30, 23-42.

Chen, Y. C., & Rogoff, K. (2003). Commodity Currencies, Journal of International Economics, 60, 133-160.

Choe, B. (1990). Rational expectations and commodity price forecasts, Policy Research. Working Paper Series, 435, The World Bank.

Cologni, A., & Manera, M. (2008). Oil Prices, Inflation and Interest Rates in a Structural cointegrated var model for the G-7 countries. Energy economics, 30, 856-888.

Derakhshan, M. (2004). Derivatives and Risk Management in Oil Markets
(second ed). Tehran: Energy Studies. (In Persian)

Derakhshan, M. (2012). Desirable characteristics of oil contracts: an economic-historical approach to the performance of oil contracts in Iran, Iranian Energy Economics Quarterly, 3(9), 53-113. (In Persian)

Economic Research Deputy. (2017). Evaluation of the 2018 Budget Bill of the Whole Country. Budget Sources, Majlis Research Center (First Version), 10, (760).

Fatuh, B. (2020) Anatomy of the Global Crude Oil Pricing System, translated by Mohammad Ali Mohammadi, first edition, Tehran: Bors Publications. (In Persian)

Hashmi, S.M.; Ahmed, F., & Alhayki, Z. (2022) The impact of crude oil prices on Chinese stock markets and selected sectors: evidence from the VAR-DCC-GARCH model. Environ Sci Pollut Res, 29, 52560.

Heshmatzadeh, M. (2018). Fifty years of OPEC and politics, Strategy Quarterly, 60, 113-140. (In Persian)

Horsnell. P., & Mabro, R. (1998). The Brent market and the formation of world oil prices. United Kingdom: Oxford University Press.

Hosseini Nasab, S. E.; Khazari, M., & Rasouli, M. (2018). Determining the effects of oil price fluctuations on Tehran Stock Exchange's stock return method: wavelet analysis and Markov selection method, Energy Economics Studies Quarterly, 8(29), 23-31. (In Persian)

Huong, L.T.M. (2020). The Role of World Oil Price in the Movements of the Asian Stock Market. International Journal of Innovation and Economic Development, 6(2), 7-18.

Jahani Raeini, P. (2018). Study of the effects of oil revenues on Iran's economy, Economic Research and Policy Quarterly, 39(40), 105. (In Persian)

Kameli, A. R. (2009). Theory of crud pricing. In N. Hossieni (Ed.), Medhanism of crude oil trandings in physical markets. Institute for International Energy Studies (IIES (., 49-62. (In Persian)

Keshavarz Haddad, M., & Manavi, S.H. (2018). The interaction of the stock market and currency in Iran based on the effect of oil shocks, Iran Economic Research Quarterly, 12(37), 155-177. (In Persian)

Khalatbari, F. (1994). Economic Basics of Oil, Tehran: Islamic Revolution Education Publications. (In Persian)

Mohajeri, P. (2011). Investigating Spott Pricing and Upcoming WTI Crude
Oil. Quarterly Journal of Economic Modeling Research, 5, 102-75. (In
Persian)

Moradi, S. M. (2016). "Russia's Energy Strategy: The Necessity of Cooperation with OPEC". Central Asia and Caucasus Quarterly, 100, 147-172. (In Persian)

Razavi, S. A. (2015). Effect of the financial market on the price of global and Iranian crude oil, Energy Planning and Policy Research Quarterly, 2, 169-194. (In Persian)

Salmani, Y. (2013). A Study of the Multi-Behavioral Pattern of Economic
Growth in Response to Crude Oil Price Fluctuations: An Application of
GARCH Models and Markov Rotational Regressions, Journal of Economic. Modeling Research, 12(3), 101-73. (In Persian)

Salvatore, C. (2015). An Autopsy of Oil Prices in World Markets, translated by Ruhollah Kohnnejad, first edition, Tehran: Ney Publishing. (In Persian)

Samuelson, P. A. (1948). Consumption Theory in Terms of Revealed Preference, Economica, 15, 243-253.

Shakeri, A. (2016). Theoretical foundations and calculation of oil vulnerability index for oil exporting countries (Case study of Iran), Iranian Energy Economy Quarterly, 19(5), 79-111. (In Persian)

Suri, A. (2011). Econometrics (first ed). Tehran: Culture. (In Persian)

Taheri Fard, A. (2013). Analysis of strategies of international oil companies in the oil and gas market, Scientific-Promotional Monthly of Oil and Gas Exploration and Production, 103, 5-14. (In Persian)

Taklif, A. (2017). Structural changes in international oil companies following the changes in the oil market, Economic Research and Policy Quarterly. 5-31. (In Persian)

Taimuri, M.; Ghasemi, A. R., & Nekonam, A. (2017). Natural gas price response to crude oil price changes in the regional market of Europe and Asia: Markov regime transfer approach. Journal of Energy Economics of Iran, 7(27), 1-30. (In Persian)

Zain al-Dini, Sh.; Karimi, M. Sh., & Khanzadi, A. (2019). Investigating the effect of oil price shocks on the performance of the Iranian stock market. Financial Economics, 14(50), 145-170. (In Persian)