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The Interrelationship Between Financial and Energy Markets pp 3–32Cite as

Risk Factors in the Oil Industry: An Upstream and Downstream Analysis

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Part of the book series: Lecture Notes in Energy ((LNEN,volume 54))

Abstract

In this paper we examine the drivers of stock market value in the upstream (producers) and downstream segments (petroleum refiners) of the oil industry. Using a sample of U.S. firms we find that stock returns of upstream and downstream firms follow stock market and oil price returns. Moreover, the upstream firm stock returns are sensitive to changes in the Canadian dollar, an important oil trade partner of the U.S., to natural gas returns and its volatility, but not to oil return volatility. Both the upstream and downstream segments present asymmetric changes regarding oil return changes. Stock returns of the oil industry respond asymmetrically to oil returns, i.e., positive oil returns had a greater impact than oil price drops in the period 1998–2004. Before 1997 we do not find any asymmetric effects, and after 2004, they are only statistically significant in the upstream segment. Overall, the evidence for asymmetric effects is more consistent across measures and time in the upstream than in the downstream segment.

The authors acknowledge financial support from Fundação para a Ciência e Tecnologia PEst-OE/EGE/UI0315/2011, from the Spanish Ministry of Education and Science, research projects ECO2012-32401 and MTM2010-17323.

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Notes

  1. 1.

    See Faff and Brailsford (1999) for evidence on Australian oil and gas industry equity returns, Sadorsky (2001) and Boyer and Filion (2007) for Canada, El-Sharif et al. (2005) for U.K., Al-Mudaf and Goodwin (1993) and Hammoudeh et al. (2004) for the U.S., Park and Ratti (2008) and Oberndorfer (2009) for Europe and Ramos and Veiga (2011) for evidence on a sample of 34 countries. Ramos and Veiga (2011) also find that the oil and gas sector in developed countries responds more strongly to oil price changes than in emerging markets.

  2. 2.

    The petroleum industry consists of three main segments commonly known as the upstream, midstream and downstream, though the midstream is usually grouped with the upstream.

  3. 3.

    Because there were few companies in each subsector, we group SIC code 1381 that corresponds to drilling oil & gas wells; SIC code 1382 to oil & gas field exploration services and SIC code 1389 that corresponds to oil & gas field services companies, not elsewhere classified (nec). Some sectors were excluded due to few observations (SIC codes 299 and 517).

  4. 4.

    The petroleum industry has been studied in the literature of hedging because it is a good illustration of the usage of derivatives. For instance, Mackay and Moeller (2007) use the SIC code 2911, and Haushalter et al. (2002) use the SIC code 1311.

  5. 5.

    It is noted that some firms changed SIC code during the period of analysis.

  6. 6.

    Natural gas is one of the cleanest burning fuels, producing primarily carbon dioxide, water vapor, and small amounts of nitrogen oxides. Natural gas is a source of energy used for both heating and also producing electricity.

  7. 7.

    See (Nandha and Faff 2008; Park and Ratti 2008; Ramos and Veiga 2011, for instance).

  8. 8.

    Both \( nopi \) and \( sopi \) (\( ngpi \) and \( sgpi \)) are nonlinear and time-dependent measures. The time dependence of \( nopi \) comes from the fact that if a shock is not large enough to increase prices above their value of the previous year, then the shock is scaled down to zero. \( sopi \) scales the shocks that occur in a volatile period down and scales those that occur in a less volatile period up.

  9. 9.

    Given that \( sopi \) also accounts for oil volatility by scaling the shocks down and up according to the volatility of the period, we do not include oil volatility in the models.

  10. 10.

    WTI is a type of crude oil used as a benchmark in oil pricing and is the underlying commodity of New York Mercantile Exchange’s (NYMEX) oil futures contracts. WTI is a light crude and is refined in Gulf Coast regions in the United States.

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Authors and Affiliations

  1. Business Research Center/UNIDE, Instituto Universitario de Lisboa (ISCTE-IUL), Avenida Das Forças Armadas, 1600-083, Lisbon, Portugal

    Sofia B. Ramos

  2. Department of Statistics and Instituto Flores de Lemus, Universidad Carlos III de Madrid, C/Madrid 126, 28903 Getafe, Spain. BRU/UNIDE, Avenida Das Forças Armadas, 1600-083, Lisbon, Portugal

    Helena Veiga

  3. Chinese Academy of Finance and Development, Central University of Finance and Economics, 39 South College Road, Haidian District, Beijing, 100081, China

    Chih-Wei Wang

Authors
  1. Sofia B. Ramos
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  2. Helena Veiga
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  3. Chih-Wei Wang
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Correspondence to Sofia B. Ramos .

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Editors and Affiliations

  1. Finance Department, Instituto Universitário de Lisboa (ISCTE-IUL), Lisboa, Portugal

    Sofia Ramos

  2. Department of Statistics, University Carlos III/Madrid, Getafe, Spain

    Helena Veiga

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Ramos, S.B., Veiga, H., Wang, CW. (2014). Risk Factors in the Oil Industry: An Upstream and Downstream Analysis. In: Ramos, S., Veiga, H. (eds) The Interrelationship Between Financial and Energy Markets. Lecture Notes in Energy, vol 54. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-55382-0_1

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  • DOI: https://doi.org/10.1007/978-3-642-55382-0_1

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