A Report on Analysis of Factors that determine the price of Crude Oil in Commodity market

Internship Report Submitted In Partial fulfillment of the Masters of Business Administration Program of Christ University, Bangalore, INDIA

By Prateek Rastogi 1121028

Under the Guidance of Company Guide Mr. Sachin Jain (Sr. Wealth Manager, Aditya Birla Money Ltd, Gurgaon, Haryana)

Faculty Guide: Dr. Ramkesh Gupta, CUIM, Bangalore CHRIST UNIVERSITY INSTITUTE OF MANAGEMENT YEAR: 2012

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CONTENTS OF PROJECT
PAGE NO. ACKNOWLEDGEMENT....3 EXECUTIVE SUMMARY..4

CHAPTER 1: Industry Profile....5-13

Indian Scenario Exchanges Commodity Market

CHAPTER 2: Company Profile....14-19

Aditya Birla Money Limited Corporate Structure Products and Services

CHAPTER 3: Research Objectives..20-25

Primary Objectives and Specific Objectives World crude oil market

CHAPTER 4: Research Methodology.26-43

Introduction Research problem Review of literature Research design Data collection Analysis Final Inference and Findings Limitations of the study

CHAPTER 5......44-46
Recommendations Learnings

BIBLIOGRAPHY..47-48 ANNEXURES...49-58

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ACKNOWLEDGEMENT

The completion of any task is the reward to not only person actively involved in accomplishing it but also to the people involved in inspiring, guiding and helping those people. I take the opportunity here to thank all those who have helped me in completion of this project, without which this indeed would have been a mammoths task. Yet this project wouldnt have been possible without the unrelenting care and support of many people.

I would like extend my regard to Prof. T.S. Ramachandran HOD of Finance Department who helped me in keeping my project according to guidelines and the way it should be.

I would like to express my `regard to Dr. Ramkesh Gupta the honorable Professor of Finance in MBA Department for his constant encouragement and support throughout the internship. He is the Project guide and he always gave me a helping hand when it was required and for also providing me the immense knowledge during the years i have been with him. He helped me a lot in my project for which I greatly thankful. I am highly indebted to him for encouraging, motivating and invaluable supporting in bringing the work to this shape, without which this project indeed would have been a quite difficult task.

I would like to thank Mr. Sachin Jain Sr. Wealth Manager, Aditya Birla Money Ltd, Gurgaon, Haryana. He not just guided me but also provided some immense ideas for my project. He also took interest in my project and provided the right path. He was always there whenever I wanted help in my project. I would like to thank Mr. Sunil Pabiya employee of Aditya Birla Money Limited for helping me in my project. Last but not the least I would like to thank all the Faculty members of M.B.A department for their support at various stages.

(Prateek Rastogi)

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EXECUTIVE SUMMARY

The purpose of this research is to form a general understanding on different factors affecting crude oil pricing. It is motivated by the rise and fall of crude oil prices in 20081 and also the increasing dependence of countries on crude oil prices. The impacts of the price changes were broad and altered industrial activity, consumer behavior and political power globally. Understanding the factors behind these changes is important for commercial investments and public policy making.

This research examines the different factors that are determined by academicians, analysts and researchers and takes into account their observations on the oil market. Oil prices have been very volatile in recent years especially. Volatility in oil prices does harm in many ways. Both developing and developed countries are affected. Spiking high prices affect poor people more directly because fuel costs are significant in food and transportation prices, which are necessary spending. High oil costs also hit economies on a macro-level and have been triggering factors in economic cycles. So, this research focuses on not all the factors but takes into account some and then analyses the factors and Crude oil price based on co integration and then finds that some variables do not co integrate with the Crude oil price which shows that there are some more variables that affect the crude oil price and hence those variables should also be considered but the data should also be available for the same from a realizable source.

Thank you Prateek Rastogi Christ University Institute of Management

2008 rise of Oil prices that saw a price of $145 per barrel.

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INDUSTRIAL PROFILE

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Chapter 1 INDUSTRY PROFILE

Commodity is a raw material or primary agricultural product that can be bought and sold. They are most often used as inputs in the production of other goods or services. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.

Indian Scenario:

Indian markets have recently thrown open a new avenue for retail investors and traders to participate: commodity derivatives. For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities are the best option. Till some months ago, this wouldn't have made sense. For retail investors could have done very little to actually invest in commodities such as gold and silver -- or oilseeds in the futures market. This was nearly impossible in commodities except for gold and silver as there was practically no retail avenue for punting in commodities. The size of the commodities markets in India is also quite significant. Of the countrys GDP of 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and dependent) industries constitute about 58 percent. However, with the setting up of three multi-commodity exchanges in the country, retail investors can now trade in commodity futures without having physical stocks! Commodities actually offer immense potential to become a separate asset class for marketsavvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets, may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. Commodities at a global level are most traded on Chicago Board of Trade; hence all the prices are quoted in USD. So the prices of commodities in India are dependent on the USD/INR exchange rate heavily.

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In India commodities trading is governed by Forward Market Commission.

Forward Market Commission: Forward Markets Commission (FMC)3 headquartered at Mumbai, is a regulatory authority which is overseen by the Ministry of Consumer Affairs, Food and Public Distribution, Govt. of India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952. The functions of the Forward Markets Commission are as follows: (a) To advise the Central Government in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the Forward Contracts (Regulation)4 Act 1952. (b) To keep forward markets under observation and to take such action in relation to them, as it may consider necessary, in exercise of the powers assigned to it by or under the Act. (c) To collect and whenever the Commission thinks it necessary, to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding supply, demand and prices, and to submit to the Central Government, periodical reports on the working of forward markets relating to such goods; (d) To make recommendations generally with a view to improving the organization and working of forward markets;

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Image taken from (Commodity Market module NCFM) FMC the regulatory body of India for future contracts.

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(e) To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary.

Exchanges
There are 22 exchanges that are recognized by the Forward Market Commission. But the following are the two exchanges in which most trading happens.

Multi commodity exchange: Headquartered in Mumbai, Multi Commodity Exchange of India Ltd (MCX) is a state-of-the-art electronic commodity futures exchange. The demutualised Exchange set up by FTIL5 has permanent recognition from the Government of India to facilitate online trading, and clearing and settlement operations for commodity futures across the country. Having started operations in November 2003, today, MCX holds a market share of over 80% of the Indian commodity futures market, and has more than 2000 registered members operating through over 100,000 trader work stations, across India. The Exchange has also emerged as the sixth largest and amongst the fastest growing commodity futures exchange in the world, in terms of the number of contracts traded in 2009. MCX offers more than 40 commodities across various segments such as bullion, ferrous and non-ferrous metals, and a number of agri-commodities on its platform. The Exchange is the world's largest exchange in Silver, the second largest in Gold, Copper and Natural Gas and the third largest in Crude Oil futures, with respect to the number of futures contracts traded.

National Commodity & Derivatives Exchange Limited (NCDEX) NCDEX is a professionally managed on-line multi commodity exchange. The shareholders of NCDEX comprises of large national level institutions, large public sector bank and companies. Promoter shareholders: ICICI Bank Limited (ICICI)*, Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956. It

FTIL stands for Financial Technologies (India) Ltd

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obtained its Certificate for Commencement of Business on May 9, 2003. It commenced its operations on December 15, 2003. NCDEX headquarters are located in Mumbai and offers facilities to its members from the centers located throughout India.

National Spot Exchange Ltd (NSEL) (NSEL) is a state-of-the-art electronic, demutualised commodity spot market. The Exchange is promoted by Financial Technologies (India) Ltd (FTIL) and National Agricultural Cooperative Marketing Federation of India Limited (NAFED). It provides an electronic, transparent, well organized and centralized trading platform with the facility to access and participate the market remotely. It facilitates risk free and hassle free purchase and sell of quality and quantity specified commodities to commodity market participants including farmers, traders, processors, exporters, importers, arbitrageurs, investors and the retail market participants. Exchange also offers various other services such as quality certification, warehousing, warehouse receipt financing, etc. NSEL has been pioneer in offering commodity based investment instruments with the launch of E series Products. NSEL is recognized by Ministry of Consumer Affairs, Food & Public Distribution, and Government of India. It has obtained licenses from various state governments to facilitate online delivery based trading in various agri-commodities. In addition the Exchange provides delivery based trading in bullions and metals across the country. NSEL commenced its live operations on15th October 2008. It has created efficient spot delivery platform, helping the sellers/producers to sell commodities directly to the end buyers comprises of processors/ exporters. Currently, NSEL holds a market share of over 98% of the Indian electronic commodity Spot market, and has more than 495 registered members operating through over 3000 trader work stations, across India. Government organizations like FCI, HAFED, MMTC, PEC, NAFED, APMARKFED, RAJFED, and CCI have been actively utilizing the Exchange platform for selling various commodities. More than 33 commodities are traded on NSEL Platform having delivery locations spread across 14 states.

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Commodity Futures:
A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Basic Terminology: Spot price: The price at which an asset trades in the spot market. Futures price: The price at which the futures contract trades in the futures market. Contract cycle: The period over which a contract trades. The commodity futures contracts On the NCDEX/MCX have one month, two months, and three months etc (not more than a year) expiry cycles. Expiry date: It is the date specified in the futures contract. This is the last day on which the contract will be traded, at the end of which it will cease to exist. Delivery unit: The amount of asset that has to be delivered less than one contract. For instance, the delivery unit for futures on Soybean on the NCDEX is 10 MT. The delivery unit for the Gold futures contract is 1 kg. Basis: Basis is the difference between the futures price and the spot price. There will be a different basis for each delivery month for each contract. In a normal market, futures prices exceed spot prices. Generally, for commodities basis is defined as spot price -futures price. However, for financial assets the formula, future price -spot price, is commonly used. Cost of carry: The relationship between futures prices and spot prices can be summarized in terms of what is known as the cost of carry. This measures the storage cost plus the interest that is paid to finance the asset. Initial margin: The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin. Marking-to-market (MTM): In the futures market, at the end of each trading day, the margin account is adjusted to reflect the investor's gain or loss depending upon the futures closing price. This is called marking to market. Maintenance margin: This is somewhat lower than the initial margin. This is set to ensure that the balance in the margin account never becomes negative. If the balance in the margin account falls below the maintenance margin, the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day.

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Commodity Products:
The following are the commodities that are most traded on volume basis in future markets:

Industry Structures and Development:

The broking industry has seen micro challenges of its own, let alone the macro concerns that exist at large. On one hand, competition has intensified, and on the other, the market product mix has undergone structural changes. There has been consistent slide in the cash market share, which is more indicative of the investment interest in the market. Further, the year saw preference for low yielding Index options which has seen its share in the overall volume on NSE7 increase from 55% in Q4 FY10 to 73% in Q4 FY11 putting significant pressure on brokerage yields. The competition is likely to lead to consolidation in the sector and rather early signs of consolidation are visible. External developments like change in technology and change in the external environment and also cost pressures on the operations front would further accelerate consolidation. The Commodities market too witnessed an overall increase in volumes. The combined commodities volumes recorded in both MCX and NCDEX increased by Rs. 3,941,196 Crores up from Rs. 7,310,887 Crores in 2009-10 to Rs.11, 252,083 Crores in the current FY 2010-11.
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Image shows the different margins set by FMC for different commodities and the various lot sizes to trade. NSE stands for National Stock Exchange, Indias national exchange.

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There has been an increase in the number of demat accounts opened in the market during the FY 2010-11 and as on March 31, 2011, the number of demat accounts stood at 1.89 Crores, an increase of 14% over the last year. The increase in Demat accounts has been in line with the growth seen in the previous years; however, the absolute numbers have not gone up significantly. Demat accounts still account for less than 2% of the countrys population, as compared to the UK, which has 16% of its population having the same. So there is still a long way to go in this market which holds a strong growth impetus within.

Commodity that is focused in this study is Crude Oil:

Crude oil is commonly known as petroleum. It is a liquid found within earth. Composed of Hydrocarbons (50-97%), Organic compounds (N2, O2, S) (6-10%), Small amounts of metal (Cu, Ni, Vn, Fe) (<1%) It has a Oligopolistic market structure. Cartels are formed by oil producing countries. Most important players in oil market are: OPEC8 Non OPEC countries

Saudi Arabia plays dominant role in the oligopolistic oil market. From econometric evidence on Saudi Arabia, there is conformation of asymmetrical behavior of low cost petroleum supplier i.e. the country restricts production in reaction to negative demand shocks, but does not expand production in response to positive ones.

OPEC stands for the Organization of the Petroleum Exporting Countries

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MILLION OF BARREL PER DAY

12 10 8 6 4 2 0 SAUDI ARABIA RUSSIA UNITED STATES

IRAN
MEXICO

Fig:- World Top 5 Producers of Crude Oil

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Fig:- World Top 5 Consumers of Crude Oil

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Image is taken from Hedge Equities report on crude oil Image is taken from Hedge Equities report on crude oil

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COMPANY ANALYSIS

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Chapter 2 COMPANY PROFILE

Aditya Birla Money Ltd

Aditya Birla Money Ltd, formerly known as Apollo Sindhoori Capital Investment Ltd is a leading player in broking space. The company is principally engaged in the business of stock broking and related activities. They have one subsidiary company, namely Apollo Sindhoori Commodities Trading Ltd. The company offers services such as, trading facility in equity segment on and derivative segment on NSE & BSE through a single screen; trading facility in commodity segment, including bullion, oils, gaur seed etc through their subsidiary; depository Participant services of NSDL11 and CDSL12 at major locations; Online bidding for IPO and distribution of mutual fund. The company is headquartered in Chennai.

Aditya Birla Money Ltd, a part of Aditya Birla financial Services Group was incorporated in the year 1995 as Apollo Sindhoori Capital Investment Ltd. Earlier, the company was promoted by Prathap C Reddy, Chairman of Apollo Hospitals Group. In March 2009, the company became a part of Aditya Birla Group, when the group acquired 76% of the company. The company commenced their operations in Chennai in the year 1996.

In August 28, 2008, the company entered into Share Purchase Agreement with Aditya Birla Nuvo Ltd for sale of 56% equity shares of the company. Pursuant to this agreement, Aditya Birla Nuvo Ltd made an open offer for purchase of 20% equity shares of the company, which was completed on February 24, 2009. As a result, the company became a subsidiary of Aditya Birla Nuvo Ltd with effect from March 6, 2009. The company changed their name from Apollo Sindhoori Capital Investments Ltd to Aditya Birla Money Ltd with effect from August 3, 2009.

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NSDL is the National Securities Depositories Limited it is the depository for the equity market in India CDSL is the Central depositories Services Limited

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Vision:

"To be the leading research house on providing value added intelligence and insightful investments conclusions on emerging companies". Company Logo:

The name Aditya Birla evokes all that is positive in business and in life. It exemplifies integrity, quality, performance, perfection and above all character.

Our logo is the symbolic reflection of these traits. It is the cornerstone of our corporate identity. It helps us leverage the unique Aditya Birla brand and endows us with a distinctive visual image.

Depicted in vibrant, earthy colors, it is very arresting and shows the sun rising over two circles. An inner circle symbolizing the internal universe of the Aditya Birla Group, an outer circle symbolizing the external universe and a dynamic meeting of rays converging and diverging between the two. ABML Corporate Structure: Graph 1: Structure ABFSG

Aditya Birla Capital Advisors Private Limited (Private Equity)

Aditya Birla Money Limited (Broking)

Aditya Birla Money Mart Limited (Wealth Management)

Aditya Birla Insurance Brokers Limited (General Insurance Advisory)

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Products and services offered by Aditya Birla Money Ltd. :

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Equity: Equities are considered more rewarding when compared to other investment options; ABML14 provides highly efficient and sophisticated trading solutions to effectively manage equity investments in an increasingly complex market. Indian markets, though in the nascent stage offer one of the most exciting and rewarding investment opportunities among the emerging market economies. Hence, as financial awareness deepens and more sophisticated instruments enter the Indian markets, investors need to tread the path cautiously.

Derivatives: The Derivative segment is a highly lucrative market that gives investors an opportunity to earn superlative profits (or losses) by paying a nominal amount of margin. Over past few years, Future & Options segment has emerged as a popular medium for trading in financial markets. Future contracts are available on Equities, Indices, Currencies and Commodities. Since derivatives instrument provide good leverage opportunity, it is a great tool for speculation. Leverage is a double edge sword for which one requires an equity advisor. ABML advisors will also help with various strategies like Bull Spread, Bear Spread, Cover call writing, hedging strategies etc. This is to help the investor to
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Image taken from companies presentation for investors ABML is the subsidiary of Aditya Birla Group stands for Aditya Birla Money Limited

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make better trading returns. The Equity advisor goes a step further to ensure that trades are settled and traded with proper margin in clients account in a timely manner. This allows giving them a convenient single window service and the advisor becomes the single point contact for all the equity related matters.

Mutual funds: Mutual Funds offer an opportunity for long term wealth creation. ABML ensures that investors are in safe hands backed by quality research and based on the needs of the client according to his income, savings, age, family background etc. With ABMLs Mutual Fund Service System, an order collection system provided by National Stock Exchange (NSE), the client can place subscription or redemption requests for mutual fund units. The client no longer have to await the status of your application from AMC or fund house, instead he can track his request through online interface and even modify the request until the time it is accepted by the mutual fund. Reduced time lags and transparency in procedures empower investors to make timely and optimal investment decisions.

Commodity: Trading in Commodities with ABML truly empowers to the investment needs. It ensure a superlative trading experience through Access to daily incisive, fundamental and technical research and analytics from the efficient in house research. Personalized services through a team of dedicated Relationship Managers and Dealers Browser and application based platforms available for commodity trading.

Currency: Currency trading is the largest market worldwide. The mechanism of the currency trading is simple all currencies have a value when compared to other currencies and it is this trading (either purchase or sale) of currencies that is done to take advantage of the shifts in the relative movement. ABML provides a flexible platform to its clients to expand and diversify their portfolios and add currency derivatives to complement their commodity and equity trading. Since its inception in August 2008, the currency futures market has grown by leaps and bounds. With

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the successful trading in USD-INR, the offerings have now been extended to Euro-Indian Rupee, Pound Sterling-Indian Rupee and Japanese Yen-Indian Rupee.

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RESEARCH OBJECTIVES

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Chapter 3 RESEARCH OBJECTIVES

PRIMARY OBJECTIVES: To find the factors that affect fundamentally the price of Crude Oil in Commodity Market. To analyze the factors and its effect on price of Crude Oil in market.

Indian

SPECIFIC OBJECTIVES: To know and understand the reason behind the change in price of Crude Oil To study the factors theoretically and statistically and analyze as to why these factors affect the crude oil To provide relevant information that will help investors to crude oil market.

OBJECTIVE AND BACKGROUND: My objective in this paper is simply to understand what factors determine oil prices and to check this relationship practically .My approach is both theoretically and Along the way I also try to present simplified answers to the following questions: What has happened in the history of oil? Does OPEC15 Reserves affect prices? What is effect on GDP due to rising oil prices? Why did the prices rise to record highs in the 2008 and why did they drop recently? The research is an analytical review into literature and evidence on the oil market. It presents the crude oil market and its underlying fundamentals and characteristics in commodity market.

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OPEC that is Organization of Petroleum Exporting Countries has 12 countries, mainly Gulf region

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There are many periodical reports and analysis on the oil market released by organizations such as the International Energy Agency of the OECD16-countries and the Energy Information Administration of the United States Department of Energy. My contribution is to bring out the factors and there affect on price so that people can analyze and invest in better way. The resulting paper is an analytical review into literature and evidence on the oil market. It presents the market and its underlying fundamentals to a reader who has no experience on the market or in advanced economics. It also reflects my path from gathering high-school level background data and learning about the basics of the market, to taking the role of a junior economist and looking into the theoretical limits and equilibriums concerned, and eventually weighing different factors in a way a commercial market analyst might

World Crude Oil Market

Commercial Oil dates back to 1857 when it was drilled in Romania. Petroleum Industry in India is also one of the oldest in the world. Oil in India was struck first in 1867 at Makum near Margherita in Assam and in Digboi in Assam first oil was struck by Burma Oil Company in 1889. Economic activity is very much dependent on Crude Oil price. Crude oil is a liquid naturally found in underground reservoirs and then it is burned to create energy. 20th century saw oil supply only 4% of the worlds energy but now it has become the most important energy source and supplies about 37% of the worlds energy. Crude oil and its by products are used mainly as raw materials or input in various manufacturing industries and some of the products obtained are petrol, Liquid petroleum gas, naphtha, kerosene, gas oil and fuel oil. Crude oil are classified according to API gravity which is American Petroleum Institute. If the oil has higher API gravity it is considered as light and if less gravity level it is considered as sour or heavy. The three primary benchmarks of oil in world trade are West Texas Intermediate (WTI), Brent Blend and Dubai & Oman. West Texas Intermediate (WTI): West Texas Intermediate commonly called as WTI is used primarily in U.S. It is light (API gravity) and sweet (low sulphur) making it ideal for producing products like low sulphur gasoline and low sulphur diesel. Brent is not light or sweet as WTI but still high grade crude and WTI typically trades at higher premium than Brent. Brent crude:
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OECD stands for Organization for Economic Co-operation and Development has 34 country members

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Brent Crude is the largest of the many major classifications of crude oil and is used to price two thirds of the worlds internationally traded crude oil supplies. Brent crude is sourced from North Sea (of Atlantic Ocean located between Great Britain and Scandinavia).

Dubai Crude: Dubai crude is used as a price benchmark because it is one of few Persian Gulf crude oil. Dubai crude is generally used for pricing Persian Gulf crude oil exports to Asia. Dubai Crude is a light sour crude oil extracted from Dubai. The Dubai benchmark is also known as Fateh is used in the United Arab Emirates.

The petroleum industry generally classifies crude oil by:1. The geographic location it is produced in. 2. Its API gravity. 3. By its sulfur content. 1. According, to the geographic location some of the types are Brent crude, WTI (West Texas Intermediate) crude etc. The geographic location is important because it affects transportation costs to the refinery. 2. API (American Petroleum Institute) Gravity:-A specific gravity scale developed by the American Petroleum Institute (API) for measuring the relative density of various petroleum liquids, expressed in degrees. It is given by: - API Gravity = 141.5/ specific gravity 131.5 E.g.: - API of water = 10. (Because S.G. of water=1). API values of some other crude oils are:Crude from Bombay High Gulf Venezuela 3. 35-38 25-28 15

According to sulfur content:- Crude oil is referred to as Sweet if it contains relatively little sulfur or Sour if it contains substantial amounts of sulfur. Sweet oil commands a higher price than Sour oil because it has fewer environmental problems and requires less refining to meet sulfur standards. Crude oil may be considered light if it has low density (or high API Gravity) or heavy if it has high density (or low API Gravity). Light crude oil is more desirable than heavy oil since it produces a higher yield of gasoline.

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Organizations for Oil Market: The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization, currently consisting of 12 oil producing and exporting countries, spread across three continents America, Asia and Africa. The members are Algeria, Angola, Ecuador, the Islamic Republic of Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates & Venezuela. OPEC was formed at a meeting held on September 14, 1960 in Baghdad, Iraq, by five Founder Members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. OPEC was registered with the United Nations Secretariat on November 6, 1962 (UN Resolution No 6363). OPEC Member Countries:
Country Algeria Angola Ecuador ** IR Iran * Iraq * Kuwait * Libya Nigeria Qatar Saudi Arabia * United Arab Emirates Venezuela*
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Joined OPEC 1969 2007 rejoined 2007 1960 1960 1960 1962 1971 1961 1960 1967 1960

Location Africa Africa South America Middle East Middle East Middle East Africa Africa Middle East Middle East Middle East South America

The Oil and Energy Ministers of the OPEC Member Countries meet at least twice a year to co-ordinate their oil production policies in light of the market fundamentals, ie, the likely future balance between supply and demand. The Member Countries, represented by their respective Heads of Delegation, may or may not alter production levels during the Meetings of the OPEC Conference. Given that OPEC Countries produce about 42 per cent of the world's crude oil and about 61 per cent of the

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Founder Members ,Ecuador joined OPEC in 1973, suspended its membership from Dec. 1992-Oct. 2007

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crude oil traded internationally, any decisions to increase or reduce production may lower or raise the price of crude oil. The impact of OPEC output decisions on crude oil prices should be considered separately from the issue of changes in the final prices of oil products, such as gasoline or heating oil. There are many factors that influence the prices paid by end consumers for oil products. In some countries taxes comprise over 60 per cent of the final gasoline price paid by consumers, so even a major change in the price of crude oil might have only a minor impact on consumer prices. At the end of 2010, OPEC had proven oil reserves of 1,193,172 million barrels of crude oil, representing 81.3 per cent of the world total of 1,467,012 million barrels.

Indian Crude Oil Market: Crude Oil in India acts as The Black Gold. Global oil demand managed to increase in 2010; as the slump in oil demand from OECD countries were outwitted by the increase in consumption in the Asia-Pacific region. Supply also remained volatile because of Libyan unrest followed by the meeting held in 2011 where OPEC members were mutually not able to decide on production quotas. In last one year the WT crude prices also witnessed high volatility, it traded in the range of $75 to $113 per barrel.

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RESEARCH METHODOLOGY

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Chapter 4 Research Methodology

INTRODUCTION
What is research? Research in common parlance refers to a search for knowledge. Once can also define research as a scientific and systematic search for pertinent information on a specific topic. In fact, research is an art of scientific investigation. Research comprises defining and redefining problems, formulating hypothesis or suggested solutions; collecting, organizing and evaluating data; making deductions and reaching conclusions; and at last carefully testing the conclusions to determine whether they fit the formulating hypothesis - Clifford Woody

PROBLEM DEFINITION

There are two types of research problems Those which relate to states of nature. Those which relate to relationship between variables.

Researchers must single out a problem they want to study i.e. he must decide the general area of interest he would like to enquire. The two steps that are involved in this: To understand the problem thoroughly; and, Rephrasing the same into meaningful terms.

As my research is based on fundamental parameters so my research problem is. To find out the different factors of pricing of crude oil in the commodity market. To analyze the causality of crude oil pricing by these factors

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REVIEW OF LITERATURE

Indian Basket has two type of Crude oil coming in the country one is WTI and other is Brent crude, the basket has majorly Brent Crude Oil and hence in the studies people have made on International market is on both WTI and Brent. The American researchers have used WTI as the price and Gulf countries mainly Brent.

In one of the studies done by A. Slaibi, D. Chapman and H. Daouk (2010)the crude oil shows the geopolitical behavior i.e. the OPEC reserves have a effect on crude oil pricing as the OPEC provides 80% of the oil consumption in the world market. In their research they have take a study done by Kauffman relating to Does OPEC matters? by using the econometric tool he has shown that the OPEC reserves do effect the Oil price. They have also highlighted that the news of OECD also affects the Crude oil price fundamentally as it is taken into account by investors while investing in the market.

One of the research paper written by F. Kesicki, U. Remme, M. Blesl, U. Fahl, A. Vo (2009) what are possible future developments in crude oil price. They have taken into account the Crude oil production, consumption and reserves data hence highlighting one of the main factors that affect price. Les Coleman (2011)in his research paper has explained the crude oil pricing using fundamental measures. Factors he has considered are oil supply, demand, political factors and major events. He has used ADF method to find the unit root of all the factors and the data is stationary and find weather those factors are correlated or not by regression. The study shows the use of Time Series statistical tool ADF.

Hedonic pricing of crude oil i.e. characteristics of crude oil affect its price. Z. WANG (2003) in his study has used Gravity (API degree), Sulfur (%) and Viscosity index Pour point. He has highlighted that the crude oil characteristics and the place where it is mined also influences the price. With this many of the articles also suggest that the WTI is much more costly than Brent as it is light and sweet and hence it also shows that many of the production cost also determines the crude oil price. His study finally shows non linearity in the price of characteristics and crude oil market valuation.

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Michael Ye & John Zyren & Carol Joyce Blumberg & Joanne Shore.(2008) in their study have shown the changing relationship between crude oil price, inventories and excess

production capacity. He also takes into account the OPEC data of production consumption and reserves. He uses WTI price for the study but I have taken Brent for comparing the crude oil price and capacities and inventory. But the analysis year wise has data of Light Sweet WTI crude oil. He uses Ratchet effect to find out the relationship or trend over years.

Janne Happonen (2009) reviewed the factors that determine the crude oil price and has historically analyzed crude oil prices based on demand, supply and reserves .He also suggest that Crude oil is affected by OPEC reserves.

Shiu-Sheng Chen (2009) has studied inflationary effects of crude oil in its pricing and his research proves that no correlation between the crude oil price and its inflation. For this he uses ADF method and then Philips Perron method to do the unit root test and check that the data is stationary and then he applies structural VAR which shows very low correlation regression coefficient.

Jan Bentzen (2007) has investigated that OPEC influences the crude oil price and for that he has taken crude oil prices for both Brent and WTI and hence he uses ADF statistical tool and DF-GLS to check that data is stationary and to do the unit root test and then applied VECM model to find out correlation between the OPEC and crude oil price and hence his study shows that OPEC does influence the crude oil price. Hence by using such literatures I have taken many variables for which I have done the Time Series Analysis and in that I have done the ADF test and VECM model. Variables are as follows: Dependent Variable Crude Oil Price BRENT Independent Variable Indian Crude oil production Indian Crude oil consumption Indian Crude oil imports World Crude oil production World Crude oil consumption

Page 29

OPEC oil reserves

And based on these variables I have applied tools with help of STATA18 v12.

RESEARCH DESIGN

The type of research design used in this research project is Causal research design. If the objective is to determine which variable might be causing certain behavior, i.e. whether there is a cause and effect relationship between variables, causal research must be undertaken. In order to determine causality, it is important to hold the variable that is assumed to cause the change in the other variable(s) constant and then measure the changes in the other variable(s).

DATA COLLECTION

The method of data collection used in this research report is Secondary Data.

Crude Oil data can be found many places like MCX website and many other organizations that keep the statistics of energy. But getting data from there is a limitation hence for the graph analysis I have taken data from MCX website for Crude Oil market price and with that data I have made the analysis based on graph on the time line 2006-2011 crude oil spot price. Then for the Crude oil price comparison from the Indian production, consumption, imports, world production, and consumption(all in Thousand barrel/day), Brent crude oil price (in dollars) from index mundi.com19 that has provided me data from 1996-2011. As the Crude Oil Price was in dollars so I have taken the average price of the dollar in each year and converted the price in Indian Rupee and OPEC reserves data has been taken from BP statistical review20 2011.

18 19

Stata is a general-purpose statistical software package created in 1985 by StataCorp Index mundi is a website that provides worldwide data. This site contains detailed country statistics, charts, and maps compiled from multiple sources. 20 BP is one of the world's leading international oil and gas companies, comes out with its annual review of energy sector.

Page 30

Data collection was not an easy part as the data is not available freely for better understanding monthly data is needed but the data was not easily available so I have taken yearly data for all the variables.

DATA ANALYSIS
Data analysis is done in two parts:

One is based on the Indian crude oil price from 2006-2011 based on the price and market events nationally and internationally. It is done theoretically just to show the trend of the crude oil price. Data taken is monthly from mcxindia.org spot market price. Data provided there was in daily basis I have take n average price for months and then plotted the data.

Second the data analysis is done for applying the statistical tool and finds the correlation and hence the data is taken from various sources for the Brent crude Oil yearly and its Indian consumption production imports and world crude oil production consumption and OPEC reserves.

Page 31

DATA ANALYSIS FIRST PART

Inference: Crude oil that just below 3000 shows movement from 3500 to 2750 and at the end it ends lower than the opening. Crude Oil imports in India increased by 10% and the Consumption in the world also increased hence showing that there was lot of demand in the markets nationally and internationally. Even the price of crude oil in foreign market shoots up to double from $38.29/barrel in 2004 to $65.39/barrel.

Page 32

Inference: Crude oil opens below 2500 and rises sharply throughout the year taking it up and above 3500 which marks the rising price of crude oil before 2008. Indian production was less hence less supply from domestic market again leading to high imports from foreign market and the increase in demand Though world production decreased marginally but OPEC oil reserves increased. At this moment Indian market was affected by high demand in the domestic market.

Page 33

Inference: Very huge and dangerous movement can be seen here as oil opens above Rs 3500 and goes up to Rs 5700 and then falls sharply and goes down till 2000 which marks how risky Crude oil price became for investment and for countries. Dramatic year for crude oil which saw rapid rise and fall throughout the year as we can see the half year saw the rise in price and then in later half fall of crude oil from Rs 5700 to Rs 2000. Growth in domestic production went negative, slight increase in imports less demand. Growth in World production negative and consumption also decreased and hence the deep fall of crude oil in the market.

Page 34

Inference: Crude oil again opened at very low but this year saw the crude oil price rising and then stabilizing later between Rs 3000 to Rs 3500. Market trying to stabilize at its price near Rs 3000/barrel. Consumption in domestic market increased and production decreased again imports from outside. World production and consumption decreased but production decrease at much higher rate than consumption hence finally taking the market up.

Page 35

Inference: Crude oil shows movement up and down making it very volatile price goes up to Rs 3800 and then Rs 3400 and then finally going up to Rs 4200. Indian production increased at much higher rate than consumption. Even in the International market the world production and consumption shot up and hence increasing the reserves of OPEC A trend to be noted that in 2007, 2009, 2010 the crude oil price rises in winter season showing the increased demand in the market of Crude oil.

Page 36

Inference: Again a very volatile year showing up and down of Rs 1000 points between the FEBAPR and then APR-AUG and then an up movement of Rs 1500 from AUG- DEC Consumption decreased and production and imports rose. World production remained same but consumption increased heavily hence taking the price up. Again following the trend of price rise at the later half or in winter season.

Page 37

PRICE
5500 4500 3500 2500 1500

PRICE

Jan-06

Aug-06

Feb-10

Sep-10

Jul-09

May-08

Mar-07

Overall price change can be seen the rise and fall of price

Page 38

Nov-11

Dec-08

Apr-11

Oct-07

DATA ANALYSIS PART TWO

In this part the STATA v12 is used first of all the Data that we have has is represented here as follows:
year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 IC 1574.67 1680.92 1765.49 1844.37 2031.25 2127.44 2183.73 2263.44 2346.33 2429.62 2512.43 2690.90 2800.75 2907.65 3007.99 3116.22 3300.00 IP 703.45 651.02 674.62 661.42 652.66 646.34 642.40 664.75 660.03 683.11 664.66 688.61 697.53 693.71 680.43 751.30 782.34 II 546.84 676.27 672.98 773.72 873.88 1336.82 1574.12 1609.78 1788.68 1911.98 1938.18 2156.00 2412.27 2556.69 2768.44 3057.63 3444.22 WP 59949.60 61282.65 63317.67 64468.21 63322.39 66263.88 65849.95 64944.79 67267.14 70557.01 71980.94 71846.10 71354.19 72151.61 70808.59 72631.37 72888.60 WC 70096.50 71686.80 73447.96 74102.60 75865.10 76778.52 77505.88 78159.38 79706.36 82555.28 84084.66 85130.52 85803.09 85433.89 84574.45 86952.47 89200.00 OR 107752.95 110272.19 111982.74 112750.89 113962.58 116392.15 117198.37 123740.49 124940.23 125868.61 127092.88 128239.06 130683.97 140935.34 146388.35 159907.51 163879.01 BCOI 597.71 726.26 695.36 525.94 763.32 1274.17 1154.93 1213.41 1345.94 1733.00 2397.64 2958.99 2996.49 4244.47 2991.73 3640.14 5176.94

IC, IP, II, WP, WC, OR is in Thousand barrel/day IC=Indian Consumption, IP=Indian Production, II=Indian Imports WP=World production, WC= World Consumption, OR= OPEC Reserves BCOI=Brent Crude Oil (INR)

Page 39

The GRAPH showing the BCOI values over time

Then to use STATA I converted the data into same log and then used the data in excel and converted to same unit log by using function called Natural Logarithm (LN [number]). Then the STATA software is used to apply the Time series and declared the data as Years and then run the TEST OF UNIT ROOT to find the lag LAG found are as follows BCOI = 0 IC IP II WP WC OR =0 =0 =6 =0 =6 =0

Page 40

This lag is used to run ADF tool the test of checking the values are stationary or not. ADF test found that: BCOI = Stationary IC IP II WP WC OR = Stationary = Stationary = Non Stationary = Stationary = Non Stationary = Stationary

Then the VECM model is used in all the variables to find the co integration between them Hence the data found are as follows VARIABLES BCOIIC BCOIIP BCOIII BCOIWC BCOIWP BCOIOR P value > 0.05 < 0.05 < 0.05 > 0.05 > 0.05 > 0.05 Co integration Result Not Co integrated Co integrated Co integrated Not Co integrated Not Co integrated Not Co integrated

This shows that there is no clear co integration between crude oil price and Indian consumption, world Consumption, world production, OPEC reserves and also the Indian production and Indian Imports. Tables are shown at the last.

Page 41

FINAL INFERENCE AND FINDING

The study shows that fundamentally the price of Crude oil is affected by all the factors that are taken in the study. The data analyzed by using VECM shows that only Indian Production and imports are co integrated and others as less co integrated. The test shows that the factors are not much co integrated showing the importance of the other factors that are not taken in the study. The results do not match completely with the literature as in different literatures they have taken much more factors for which data were not available. The factors like Indian Production and Imports that are co integrating match with the literature hence showing that these factors affect the pricing of crude oil.

Page 42

LIMITATIONS OF THE STUDY

This study is a broad review of factors surrounding oil prices and thus does not go indepth to many of the factors. One should emphasize on all the factors

While analyzing the prices I focus mostly on fundamental concepts. Some concepts such as supply shocks are not considered.

My analysis focuses on Indian crude oil prices that are only Brent Crude Oil, thus prices of refined oil products are not analyzed directly, but only through the demand they reflect on crude oil.

Even taxation or allowances that effect Pricing of oil is also left out to keep the study in reason.

Information about production costs, detailed production numbers, and OPEC quota compliance were not available thus limiting numerical analysis.

Finding the data is also a limitation as data for Brent crude oil in multi commodity exchange was available only from year 2005 and my study is based on 1995-

Page 43

CHAPTER 5

Page 44

RECOMMENDATIONS

Fundamental analysis shows that there are seasonal trends that the crude oil price goes up in the latter half of year during winter time due to huge demand hence the investors can focus on such trend.

Current market shows that there is a decrease in crude oil market hence the price will go up in near as we go to latter half of the year.

The analysis on crude oil shows that the crude oil in commodity market is not co integrated with the Indian consumption or world consumption and production hence in a market crude oil affected by more factors which are not included in the study due to data limitation some of them are inflationary affects and demand supply shock.

The cost of production and imports in Indian market affects the price hence showing that the market is sensitive to the imports, the main market for Indian imports that comes in Indian Basket is Dubai, Singapore and gulf countries like Iran.

Current volatility in International markets like Europe and Indian markets shows weak economies have shrinked the demand and hence we can hope for the price rise in future.

The change of payment mechanism in the trade of Crude oil with Iran is also affecting the crude oil pricing

Page 45

MY LEARNINGS
Company focused on providing learning on how to do Fundamental and Technical Analysis of Commodities in Commodity Market

I learned the Fundamental Analysis is necessary to judge the behavior of investors as the investors base sentiments are affected by the news they get by the environment.

I have also learned the different the Technical Analysis of commodities, some of the are Moving Average Convergence Divergence, RSI, Stochastic, Advance Decline, Daily Moving Average and Exponential Moving Average.

The commodities that were focused were the Gold, Silver, Copper, Crude Oil, Aluminum, Nickel and Zinc.

Then I also brought business for the company and that also amounted by my learnings as I had to meet investors and then tell them about company and the commodity market.

My mentor gave me a work as Team Manager to assist the upcoming interns for the Fundamental and Technical Analysis and Commodities.

In the organization I was given a terminal to trade in the market which also gave me practical knowledge of how the stock market and commodity market works and how the trade happens.

Page 46

BIBLIOGRAPHY
Kesicki, F., Remme, U., Blesl M., Fahl U., Vo A. (2009). The third oil price surge What is different this time and what are possible future oil price developments. Universitt Stuttgart Institut fr Energiewirtschaft und Rationelle Energieanwendung

Bentzen, Jan (2007). Does OPEC influence crude oil prices? Testing for comovements and causality between regional crude oil prices. Applied Economics. Department of Economics, Aarhus School of Business, University of Aarhus, Silkeborgvej 2, DK- 8000 Aarhus C, Denmark. 39(1375-1385)

Hamilton, James.D (2008). Understanding Crude Oil Prices. Department of Economics ,University of California, San Diego

Fattouh, Bassam (2007). The Drivers of Oil Prices: The Usefulness and Limitations of Non- Structural Model, the DemandSupply Framework and Informal Approaches. Department of Financial and Management Studies, SOAS University of London

Wang, Z (2003). Hedonic prices for crude oil. Department of Economics, Monash University, Australia. 10(857-861)

Happonen, Janne (2009). A Review of Factors Determining Crude Oil Prices. HELSINKI SCHOOL OF ECONOMICS Department of Economics.

Ye, Michael & Zyren, John & Blumberg, Carol Joyce & Shore, Joanne (2008). A Short-Run Crude Oil Price Forecast Model with Ratchet Effect. Springer

Coleman, Les. (2011). Explaining crude oil prices using fundamental measures. Energy Policy-ELSEVIER

Chen, Shiu-Sheng. (2009). Revisiting the Inflationary Effects of Oil Prices. The Energy Journal, Vol. 30

Page 47

Index

Mundi,

home

of

the

Internet's

most

complete

country

profiles.(

http://www.indexmundi.com/commodities/?commodity=crude-oilbrent&months=300)

British Petroleum one of the world's leading international oil and gas companies, providing its customers with fuel for transportation,

(http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and _publications/statistical_energy_review_2011/STAGING/local_assets/pdf/statistical_r eview_of_world_energy_full_report_2011.pdf)

MCX India website for Commodity trading (www.mcxindia.com)

Page 48

ANNEXURES
TABLES

Table 1: Brent Crude Oil Dickey Fuller GLS Test Of Lag

. dfgls BCOI DF-GLS for BCOI Maxlag = 7 chosen by Schwert criterion DF-GLS tau Test Statistic . -0.734 -0.793 -1.124 -1.798 -1.610 -2.322 1% Critical Value -3.770 -3.770 -3.770 -3.770 -3.770 -3.770 -3.770 Number of obs = 8

[lags] 7 6 5 4 3 2 1

5% Critical Value -10.748 -6.943 -4.539 -3.248 -2.780 -2.848 -3.164

10% Critical Value -7.753 -4.848 -3.065 -2.166 -1.913 -2.067 -2.390

Opt Lag (Ng-Perron seq t) = 0 [use maxlag(0)]

Tables 2: Augmented Dickey Fuller Test for unit root and checking stationarity Brent Crude oil
. dfuller BCOI, trend regress lags(0) Dickey-Fuller test for unit root Number of obs = 15

Test Statistic Z(t) -4.013

Interpolated Dickey-Fuller 1% Critical 5% Critical 10% Critical Value Value Value -4.380 -3.600 -3.240

MacKinnon approximate p-value for Z(t) = 0.0084

D.BCOI BCOI L1. _trend _cons

Coef.

Std. Err.

P>|t|

[95% Conf. Interval]

-1.163343 -.0079699 -.0868526

.2898861 .015688 .1468237

-4.01 -0.51 -0.59

0.002 0.621 0.565

-1.79495 -.0421511 -.4067541

-.5317351 .0262113 .2330488

Table 3: OPEC Reserve Dickey Fuller GLS Test of Lag

Page 49

. dfgls OR DF-GLS for OR Maxlag = 7 chosen by Schwert criterion DF-GLS tau Test Statistic . -0.443 -0.362 -1.666 -1.925 -1.567 -1.229 1% Critical Value -3.770 -3.770 -3.770 -3.770 -3.770 -3.770 -3.770 Number of obs = 8

[lags] 7 6 5 4 3 2 1

5% Critical Value -10.748 -6.943 -4.539 -3.248 -2.780 -2.848 -3.164

10% Critical Value -7.753 -4.848 -3.065 -2.166 -1.913 -2.067 -2.390

Opt Lag (Ng-Perron seq t) = 0 [use maxlag(0)]

Tables 4: Augmented Dickey Fuller Test for unit root and checking stationarity OPEC Reserves
. dfuller OR, trend regress lags(0) Dickey-Fuller test for unit root Number of obs = 15

Test Statistic Z(t) -4.023

Interpolated Dickey-Fuller 1% Critical 5% Critical 10% Critical Value Value Value -4.380 -3.600 -3.240

MacKinnon approximate p-value for Z(t) = 0.0082

D.OR OR L1. _trend _cons

Coef.

Std. Err.

P>|t|

[95% Conf. Interval]

-1.165112 -.0035691 -.0022044

.2896379 .001697 .0129614

-4.02 -2.10 -0.17

0.002 0.057 0.868

-1.796178 -.0072666 -.0304449

-.5340447 .0001284 .0260361

Table 5: World Consumption Dickey Fuller GLS Test of Lag

Page 50

. dfgls WC DF-GLS for WC Maxlag = 7 chosen by Schwert criterion DF-GLS tau Test Statistic . -12.642 -2.309 -2.589 -2.835 -1.788 -2.338 1% Critical Value -3.770 -3.770 -3.770 -3.770 -3.770 -3.770 -3.770 6 with RMSE .0006921 Number of obs = 8

[lags] 7 6 5 4 3 2 1

5% Critical Value -10.748 -6.943 -4.539 -3.248 -2.780 -2.848 -3.164

10% Critical Value -7.753 -4.848 -3.065 -2.166 -1.913 -2.067 -2.390

Opt Lag (Ng-Perron seq t) =

Tables 6: Augmented Dickey Fuller Test for unit root and checking stationarity World Consumption
. dfuller WC, trend regress lags(6) Augmented Dickey-Fuller test for unit root Number of obs = 9

Test Statistic Z(t) .

Interpolated Dickey-Fuller 1% Critical 5% Critical 10% Critical Value Value Value -4.380 -3.600 -3.240

MacKinnon approximate p-value for Z(t) = 1.0000

D.WC WC L1. LD. L2D. L3D. L4D. L5D. L6D. _trend _cons

Coef.

Std. Err.

P>|t|

[95% Conf. Interval]

-38.26106 32.72782 30.82915 24.97254 19.89388 12.97598 5.790103 .0079027 -.6860402

0 0 0 0 0 0 0 0 0

. . . . . . . . .

. . . . . . . . .

. . . . . . . . .

. . . . . . . . .

Table 7: World Production Dickey Fuller GLS Test of Lag

Page 51

. dfgls WP DF-GLS for WP Maxlag = 7 chosen by Schwert criterion DF-GLS tau Test Statistic . -0.910 -2.126 -2.702 -1.326 -2.683 -2.205 1% Critical Value -3.770 -3.770 -3.770 -3.770 -3.770 -3.770 -3.770 Number of obs = 8

[lags] 7 6 5 4 3 2 1

5% Critical Value -10.748 -6.943 -4.539 -3.248 -2.780 -2.848 -3.164

10% Critical Value -7.753 -4.848 -3.065 -2.166 -1.913 -2.067 -2.390

Opt Lag (Ng-Perron seq t) = 0 [use maxlag(0)]

Tables 8: Augmented Dickey Fuller Test for unit root and checking stationarity World Production
. dfuller WP, trend regress lags(0) Dickey-Fuller test for unit root Number of obs = 15

Test Statistic Z(t) -4.090

Interpolated Dickey-Fuller 1% Critical 5% Critical 10% Critical Value Value Value -4.380 -3.600 -3.240

MacKinnon approximate p-value for Z(t) = 0.0065

D.WP WP L1. _trend _cons

Coef.

Std. Err.

P>|t|

[95% Conf. Interval]

-1.164402 .0012276 -.0234864

.2846848 .0014357 .0141361

-4.09 0.86 -1.66

0.001 0.409 0.123

-1.784677 -.0019005 -.0542862

-.5441274 .0043557 .0073134

Table 9: Indian Imports Dickey Fuller GLS Test of Lag

Page 52

. dfgls II DF-GLS for II Maxlag = 7 chosen by Schwert criterion DF-GLS tau Test Statistic . -2.098 -0.557 -0.977 -1.936 -0.675 -1.298 1% Critical Value -3.770 -3.770 -3.770 -3.770 -3.770 -3.770 -3.770 6 with RMSE .0013265 Number of obs = 8

[lags] 7 6 5 4 3 2 1

5% Critical Value -10.748 -6.943 -4.539 -3.248 -2.780 -2.848 -3.164

10% Critical Value -7.753 -4.848 -3.065 -2.166 -1.913 -2.067 -2.390

Opt Lag (Ng-Perron seq t) =

Tables 10: Augmented Dickey Fuller Test for unit root and checking stationarity Indian Imports
. dfuller II, trend regress lags(6) Augmented Dickey-Fuller test for unit root Number of obs = 9

Test Statistic Z(t) .

Interpolated Dickey-Fuller 1% Critical 5% Critical 10% Critical Value Value Value -4.380 -3.600 -3.240

MacKinnon approximate p-value for Z(t) = 1.0000

D.II II L1. LD. L2D. L3D. L4D. L5D. L6D. _trend _cons

Coef.

Std. Err.

P>|t|

[95% Conf. Interval]

3.498159 -2.142669 -1.765411 -.846858 -.9572902 -.6902582 -.077727 -.0261107 .6196181

0 0 0 0 0 0 0 0 0

. . . . . . . . .

. . . . . . . . .

. . . . . . . . .

. . . . . . . . .

Table 11: Indian Production Dickey Fuller GLS Test of Lag

Page 53

. dfgls IP DF-GLS for IP Maxlag = 7 chosen by Schwert criterion DF-GLS tau Test Statistic . -0.647 -1.222 -0.921 -0.725 -2.087 -2.112 1% Critical Value -3.770 -3.770 -3.770 -3.770 -3.770 -3.770 -3.770 Number of obs = 8

[lags] 7 6 5 4 3 2 1

5% Critical Value -10.748 -6.943 -4.539 -3.248 -2.780 -2.848 -3.164

10% Critical Value -7.753 -4.848 -3.065 -2.166 -1.913 -2.067 -2.390

Opt Lag (Ng-Perron seq t) = 0 [use maxlag(0)]

Tables 12: Augmented Dickey Fuller Test for unit root and checking stationarity Indian Production
. dfuller IP, trend regress lags(0) Dickey-Fuller test for unit root Number of obs = 15

Test Statistic Z(t) -6.098

Interpolated Dickey-Fuller 1% Critical 5% Critical 10% Critical Value Value Value -4.380 -3.600 -3.240

MacKinnon approximate p-value for Z(t) = 0.0000

D.IP IP L1. _trend _cons

Coef.

Std. Err.

P>|t|

[95% Conf. Interval]

-1.403838 -.0044567 .0216321

.2302037 .0020622 .0178756

-6.10 -2.16 1.21

0.000 0.052 0.250

-1.905409 -.0089499 -.0173154

-.9022672 .0000365 .0605796

Table 13: Indian Consumption Dickey Fuller GLS Test of Lag

Page 54

. dfgls IC DF-GLS for IC Maxlag = 7 chosen by Schwert criterion DF-GLS tau Test Statistic . -0.387 -1.248 -1.319 -1.484 -1.786 -2.090 1% Critical Value -3.770 -3.770 -3.770 -3.770 -3.770 -3.770 -3.770 Number of obs = 8

[lags] 7 6 5 4 3 2 1

5% Critical Value -10.748 -6.943 -4.539 -3.248 -2.780 -2.848 -3.164

10% Critical Value -7.753 -4.848 -3.065 -2.166 -1.913 -2.067 -2.390

Opt Lag (Ng-Perron seq t) = 0 [use maxlag(0)]

Tables 14: Augmented Dickey Fuller Test for unit root and checking stationarity Indian Consumption
. dfuller IC, trend regress lags(0) Dickey-Fuller test for unit root Number of obs = 15

Test Statistic Z(t) -3.460

Interpolated Dickey-Fuller 1% Critical 5% Critical 10% Critical Value Value Value -4.380 -3.600 -3.240

MacKinnon approximate p-value for Z(t) = 0.0439

D.IC IC L1. _trend _cons

Coef.

Std. Err.

P>|t|

[95% Conf. Interval]

-1.042822 .000916 -.0542485

.3013948 .001234 .0205358

-3.46 0.74 -2.64

0.005 0.472 0.022

-1.699505 -.0017726 -.0989921

-.3861395 .0036046 -.009505

Vector Error Correction Model

Table 15:Vector Error Correction Model for Brent Crude Oil and Indian Consumption

Page 55

Coef. D_BCOI _ce1 L1. BCOI LD. IC LD. _cons D_IC _ce1 L1. BCOI LD. IC LD. _cons -.0881256 -1.286933

Std. Err.

P>|z|

[95% Conf. Interval]

.4229233

-3.04

0.002

-2.115847

-.4580182

.2402907

.3292905

0.73

0.466

-.4051068

.8856883

5.134664 -.0001927

3.245865 .0730447

1.58 -0.00

0.114 0.998

-1.227115 -.1433577

11.49644 .1429722

.0316171

-2.79

0.005

-.150094

-.0261572

.0414113

.0246173

1.68

0.093

-.0068376

.0896603

-.3388416 .0028147

.242656 .0054607

-1.40 0.52

0.163 0.606

-.8144386 -.0078881

.1367555 .0135175

Table 15:Vector Error Correction Model for Brent Crude Oil and Indian Production
Coef. D_BCOI _ce1 L1. BCOI LD. IP LD. _cons D_IP _ce1 L1. BCOI LD. IP LD. _cons .0222953 .0557524 0.40 0.689 -.0869775 .131568 -1.555952 .3465941 -4.49 0.000 -2.235264 -.8766399 Std. Err. z P>|z| [95% Conf. Interval]

.3700998

.2329559

1.59

0.112

-.0864855

.826685

-4.000367 -.0001114

1.337626 .0633678

-2.99 -0.00

0.003 0.999

-6.622066 -.1243099

-1.378669 .1240872

-.0618283

.0374728

-1.65

0.099

-.1352737

.011617

-.4989922 -.0077721

.2151678 .0101932

-2.32 -0.76

0.020 0.446

-.9207133 -.0277504

-.0772711 .0122062

Table 16:Vector Error Correction Model for Brent Crude Oil and Indian Imports

Page 56

Coef. D_BCOI _ce1 L1. BCOI LD. II LD. _cons D_II _ce1 L1. BCOI LD. II LD. _cons -.3123916 -1.632003

Std. Err.

P>|z|

[95% Conf. Interval]

.4042856

-4.04

0.000

-2.424388

-.8396173

.3843133

.2638551

1.46

0.145

-.1328331

.9014598

.6915365 -.0000656

.5068926 .0665257

1.36 -0.00

0.172 0.999

-.3019547 -.1304536

1.685028 .1303224

.1680521

-1.86

0.063

-.6417678

.0169845

.3068136

.1096784

2.80

0.005

.0918478

.5217793

-.3349967 .0003427

.2107035 .0276532

-1.59 0.01

0.112 0.990

-.7479679 -.0538566

.0779744 .0545419

Table 17:Vector Error Correction Model for Brent Crude Oil and World Production
Coef. D_BCOI _ce1 L1. BCOI LD. WP LD. _cons D_WP _ce1 L1. BCOI LD. WP LD. _cons -.0581855 .0590435 -0.99 0.324 -.1739087 .0575376 -1.691811 .4309796 -3.93 0.000 -2.536515 -.8471062 Std. Err. z P>|z| [95% Conf. Interval]

.5568812

.2799897

1.99

0.047

.0081114

1.105651

-3.070527 -.0001013

2.139258 .0643723

-1.44 -0.00

0.151 0.999

-7.263396 -.1262686

1.122343 .126066

.047415

.0383581

1.24

0.216

-.0277656

.1225956

-.5417525 .0029455

.2930749 .0088189

-1.85 0.33

0.065 0.738

-1.116169 -.0143392

.0326638 .0202302

Table 18:Vector Error Correction Model for Brent Crude Oil and OPEC Reserves

Page 57

Coef. D_BCOI _ce1 L1. BCOI LD. OR LD. _cons D_OR _ce1 L1. BCOI LD. OR LD. _cons .0250131 -1.794162

Std. Err.

P>|z|

[95% Conf. Interval]

.3786061

-4.74

0.000

-2.536216

-1.052107

.7368495

.272872

2.70

0.007

.2020301

1.271669

-4.113065 -.0000505

2.48949 .0589194

-1.65 -0.00

0.098 0.999

-8.992376 -.1155304

.7662456 .1154294

.0436028

0.57

0.566

-.0604468

.1104731

-.0537962

.0314258

-1.71

0.087

-.1153895

.0077972

-.4941306 -.0036196

.2867063 .0067856

-1.72 -0.53

0.085 0.594

-1.056065 -.016919

.0678034 .0096799

Coef. D_BCOI _ce1 L1. BCOI LD. WC LD. _cons D_WC _ce1 L1. BCOI LD. WC LD. _cons -.0453014 -1.542595

Std. Err.

P>|z|

[95% Conf. Interval]

.4696529

-3.28

0.001

-2.463098

-.6220926

.3068444

.3464919

0.89

0.376

-.3722673

.9859561

4.68229 -.0000182

5.733906 .0663506

0.82 -0.00

0.414 1.000

-6.555959 -.130063

15.92054 .1300266

.0251199

-1.80

0.071

-.0945354

.0039327

.0085473

.0185325

0.46

0.645

-.0277758

.0448703

-.1797794 .0006202

.306684 .0035488

-0.59 0.17

0.558 0.861

-.780869 -.0063354

.4213103 .0075757

Page 58