Oil price fluctuation is a phenomenon that affects every household and business across the country. It can have a direct effect on the cost structure of firms that are fairly intensive users of energy, such as transportation and manufacturing firms. The prices of crude oil and petroleum products are the result of thousands of transactions taking place simultaneously at all points of the supply chain, from the point of production to the consumer.
Among the many factors that influence oil prices, one of the most influential is speculation. Speculation is a form of financial risk-taking in which participants seek to gain profits by betting on the future price of an asset. It is a common practice in the financial markets. However, recent studies have shown that speculative shocks to oil prices are often short lived.
On the other hand, shocks to the flow demand or flow supply of oil can also cause prices to jump significantly. For example, a natural disaster such as Hurricane Harvey can disrupt the flow of oil to refineries and the end-consumers.
The historic drop in oil prices during the Covid-19 pandemic led to many countries experiencing negative prices for the first time ever. This article utilizes a multivariate autoregressive distributed lag (ARDL) approach incorporating a structural break to explore the impact of the coronavirus on the oil market. The results show that increases in the number of Covid-19 cases and expected stock market volatility influenced the price of crude oil during the pandemic.