International commodity management term paper

assignment on
Fundamental analysis and technical analysis
On crude oil (Team- D)

Submitted by
Anshul Vuppuloori (1226114104)
Bandaru Ramya (1226114105)
Dasaraju Naga Raja Phanendra Varma (1226114112)
Hima Venkata Divya Vakada (1226114114)
Mohammed Naseer Khan (1226114117)
Regidi Sai Srinivas Kaushik (1226114131)
Sarath Chandra Reddy P (1226114134)
Illuri Amarnadh Reddy (1226114141)

Introduction
Crude Oil is a naturally occurring thick, dark brown flammable liquid which is
derived from Fossil Fuels. Crude Oil is also referred as Black Gold as it of immense
economic importance. It is a non renewable resource, thus its demand is greater than
supply leading to high price rise. It is recovered mostly through oil drilling
and is then refined into a large number of
consumer products, like petrol, kerosene,
plastics and pharmaceuticals. It is a type of
Fossil Fuel consisting of a complex mixture
of hydrocarbons.

Oil is a magic word that always makes news. There is hardly a nation that does not seek
this indispensable natural resource. A country that already possesses crude oil wants
more. They struggle to explore it at almost any cost. The common man does not know
much about this strange mineral oil although in almost every country he bears the
burden of the cost of exploration of oil or its import.
Oil or Petroleum is defined in a variety of ways by geologists, chemists, refiners,
engineers and lawyers. There is, therefore, no uniformity or full agreement. Since, it is a
natural product forming a part of rocks, geological definition finds more general
acceptance.
The word petroleum is derived from two Latin words petra means rock and oleum means
oil. Petroleum is loosely called rock oil or crude oil. It is a generic term covering a
wide range of substances comprising hydrocarbons, which are naturally occurring
molecules of carbon and hydrogen.

Uses of crude oil:

Issues:Statement of the Problem in crude oil prices:Crude oil price is an important parameter for refining industries, which has a bearing on
economy, because it is vital input for productivity. There is a vast gap in demand and
production of crude oil in India. National oil companies are able to produce 23-24% of
Indias total requirements of crude oil. The production of crude oil from public sector
enterprises in India has been decreasing due to old and the maturity of the fields.

India is not self-reliance on crude oil production; therefore, it is necessary and inevitable
to import the crude oil to bridge the gap between demand and supply. The increase in
international crude oil prices will make import costly and raise the Indian crude basket
price. Therefore, both international crude oil price rise and import dependency on crude
oil are the problematic area that may damage the Indian economy.

It is estimated that the import dependence of India associated with crude oil is expected
to 94% by the end of 2030. Therefore, the trouble water in Indian crude oil demand and
supply management is the rise in international crude oil prices followed with the extent of
the increase in crude oil requirement with respect to feasible higher GDP growth 8% to
9%. The import dependence of India associated with crude oil is from 76% in 2011-12 to

80% by the end of twelfth plan (2012-17). As crude oil prices are rising globally and
imports will be expensive, it is necessary to understand the consequences of crude oil
price rise on the economy.
Therefore, there is an urgent need to look holistic picture of whether the changes in
Indian crude basket prices have any implication on Inflation and GDP growth, or is there
any link between Indian crude oil basket price change and Inflation or Inflation is the
cause of concern for slowdown of GDP growth, what should be our strategy to meet the
growing demand of crude oil for economic growth. It is against this backdrop that we
attempt, in this study, to critically analyze the impact of the change in crude oil prices on
Indian economy. Therefore, there is an urgent need to look at holistic picture of
investment in Brown field and Green field projects in petroleum industry, use of new
technologies in the area for Oil and Gas business.
The desire of the study is to understand, how the increase in Indian basket price of crude
due to raise in international crude oil prices impact the economic indicators like inflation
and GDP growth. The essence of the study is to garner the understanding of the causal
relationship with the phenomenon of complexity of historic facts in crude oil prices and
social reality of economic development and economic growth. The study is essential for
both knowledge and to help in solving problems of businesses arising out due to
inflation, predicting the future price signal in relation to the business environment and
economic growth.
No similar research initiative has been undertaken in India that has focused on causal
study and the impact of Indian crude basket price on the economic indicators like the
inflation and GDP growth of the economy.

The import requirement of crude oil is 73 76 % of total demand, which is equal to

141.9MT for the year ending 2011-12 and growing annually at the rate of 2.9%. To meet
the demand, the crude oil is being imported from gulf countries through long term
contract and international tie up is essential to avoid any supply shock. The Indian basket
of crude comprising of the composition represents average of Oman & Dubai for sour
grades and Brent (Dated) for sweet grade in the ratio of 67.6:32.4 from 1st April'2010.

Fundamental analysis:INDIAN SCENARIO in crude oil:India is and shall remain heavily dependent on coal for about half of its primary
commercial energy requirements with the other half being dominated by oil and gas put
together. The Indian hydro carbon industry is currently passing through a challenging
phase. Increasing concern for energy security, increasingly stringent environmental
regulations, emergence of natural gas and soaring crude oil and natural gas prices have
thrown up both challenges and opportunities to the Indian oil and gas industry.

Projected high domestic demand for petroleum products is expected to push

investments into the refining sector. India, with 18 refineries, currently has asurplus
refining capacity which has placed India amongst net petroleum product exporter
countries. Increasingly stringent fuel specifications have put pressure on the old and noncompliant refineries to upgrade their refinery configurations to produce compliant fuels.
The Government is seriously considering promoting India as a competitive refining
destination to service export market for petroleum products as also integrating it with the
petrochemical and chemicals businesses to produce and export higher revenue generating
value-added products. Exceptionally high crude oil prices in the international market and
an almost stagnant domestic crude oil production has caused a drain on countrys foreign
exchange reserves. Besides augmenting domestic reserves, India has successfully
ventured overseas to acquire oil and gas assets and entered into long-term Liquefied
Natural Gas (LNG) contracts as measures for enhancing energy security.

Persistence of high oil prices and dependence on imported oil leaves India with
some difficult choices to make. The choice is between (a) passing on the price increase to
the consumer; (b) rationalizing taxes and other levies on petroleum products; and (c)
making the National Oil Companies (NOCs) bear the burden. Although the Government
has resorted to a combination of all above three options in the past, each of these options
has its own drawbacks. In the long run, the only viable policy to deal with high
international oil prices is to rationalize the tax burden on oil products over time, remove
anomaly, if any, in the existing pricing mechanism, realize efficiency gains through
competition at the refinery gate and retail prices of petroleum
With the advent of LNG and progressive de-control of gas prices, the natural gas

sector in India has progressed and achieved some degree of maturity. It has managed to
receive progressively growing attention from global companies and has made rapid
strides during the last five years. Current natural gas policy dispensations have created
numerous challenges for the gas sector. Major among them are the demands of competing
consumer industries, ensuring competition and open access in the pipeline
Transportation and distribution networks,
reducing the supply demand gap that exists
today.

Issues related to ecological balance but also established delivery mechanisms, the
technological constraints that are prevalent in the system and immediate compulsion to
meet the priority needs of the economy, economic equity and self-reliance. Simultaneous
and concurrent action is, therefore, necessary to ensure that the short-term concerns do
not detract the economy away from the long-term goals.

MAJOR OIL PRICE BENCH MARKS:-

THE ECONOMICS OF OIL:-

IMPACT OF CRUDE OIL PRICES IN INDIAN ECONOMY

India is the 7th largest country with the land mass of 3.29 million sq.k.m and second largest
in population of over one billion. It accounts for 16 per cent of the world population. The
country has to produce about one trillion worth of GDP to fulfill the needs of its huge
population. In order to produce this one trillion dollar worth of output, India needs 2.5 million
of oil per day which is 6.5 per cent of total world demand for oil. The share of commercial
energy consumption in total energy consumption has increased from 29 per cent in 1953-54
to 68.2 per cent in 2001-02. These ever exert demand profound influence on the growth and
inflation levels in India.
International oil price assumed to affect the domestic prices. However in Indias case the
sharp increase in international oil prices has not been fully transmitted in to the domestic
prices. The administrative price mechanism had shielded the country from the impact of oil
shocks.
A sustained rise in international crude oil prices leads to bleeding of the state
exchequer. It becomes untenable for the government to allow the subsidy bill to inflate in
times of global supply shocks & disruptions. In such cases, the government passes on the
burden to the consumers by allowing the OMCs to hike the fuel prices in the domestic
market. The hike in fuel prices has a cascading effect on the Indian Economy. The same is
explained below.

INFLATION: Rise in fuel prices has a direct impact on the prevailing inflation rate
in the economy. Higher fuel prices (in particular Diesel) lead to increase in
transportation costs across the country. As a result of which the price of essential
commodities (such as food items, cement, coal etc) shoots up. Inflationary
expectations among traders lead to hoarding which pushes the spiralling inflation rate
further up.
EROSION OF PROFIT MARGINS: Rise in inflation rate in turn leads to erosion of
profit margins of business enterprises as the key inputs for business become costlier &
consumers reduce their spending. Inevitably, the earnings growth of corporate India
slows down.
HIKE IN INTEREST RATES: The Reserve Bank of India (RBI) is entrusted with
the responsibility of containing inflation in the Indian economy through periodic
Monetary Policy review. In case of inflation zooming beyond the comfort zone, the
RBI steps in to bring it down to an acceptable level. It does so by increasing the Cash
Reserve Ratio (a portion of deposits which banks have to keep with the RBI), Repo
Rate (the rate at which banks borrow funds from the RBI) & Reverse Repo Rate (the
rate at which RBI borrows money from the banks). As a consequence of rise in these

key rates, banks are left with lesser funds to lend to their customers. Thereby sucking
out the excess liquidity in the economy. Banks are forced to follow suit & increase the
cost of loans to its customers. A hike in interest rates also attracts foreign capital flows
which may lead to appreciation of the Indian Rupee. Such appreciation dampens the
profitability of Indian exporters, at times forcing them to shut shop.

CAPEX POSTPONEMENT: Corporate India largely relies on borrowings from banks

for business expansion. In view of inflationary trends & dearer cost of funds, corporate
India puts it Capital Expenditure (CAPEX) plans in the cold storage. The idea is to wait
for the inflation & interest rates to come down before initiating any new projects.
REDUCTION IN CREDIT GROWTH: A reduced level of investment in the economy
due to increase in interest rates leads to a slowdown in the credit growth (Loan
Disbursement) of banks, the lubricant of every economy.
FALL IN EMPLOYMENT OPPORTUNITIES: As business activity in the economy
takes a hit, generation of employment opportunity also suffers a setback.
SLOWDOWN IN ECONOMIC GROWTH: A sustained rise in interest rates in the
economy begins to hurt the economic growth. Reduced investment, lower spending on
Infrastructure & fall in domestic consumption of goods & services puts a break on the
growth of the economy.

When Oil Prices Move Up:

GDP is affected negatively.

Inflation increases.

Government spending on subsidy increases.

Exports become weak.

Foreign currency reserve depletes.

Share market crumbles.

Investment decreases.

CALCULATIONS OF OIL PRICES IN INDIA

The above mentioned highlights have greatly influenced the total cost price of oil in

the country. All the factors like import tax, excise duty and other taxes levied by the
government affects the total cost price. Here there is an explanation of how fuel price is
calculated and how taxes influence the cost price. The cost price of petrol per litre is Rs 76.48
(as on march 1st 2014 at Chennai), following is the break up for the same :
Basic Price: Rs. 37.33
Excise duty: Rs. 16.55
Education Tax: Rs. 0.48
Dealer commission: Rs. 1.50
VAT: Rs. 6.5
Crude Oil Custom duty: Rs. 2.1
Petrol Custom: Rs 3.54
Transportation Charge: Rs. 8.48
Total price: Rs 76.48
Consumers Perception:
High inflation has brought down the car market forcing the car manufacturers to come up
with exciting offers to lure customers. But the offers didnt turn out to be successful because
consumers had their own perspectives.

92% of the prospective buyers have a belief that the fuel price will go down in another
three to four months and they wish to wait for their next purchase.
66% have switched over to public transport and quit driving.

87% consumers are in hunt for a fuel efficient car.

38% of the consumers are trading or selling their cars in return of something with
better fuel efficiency.
20% of the prospective buyers are happy driving their two-wheelers.

Some Miscellaneous effects of rising fuel prices

Apart from having a devastating effect on the Indian car industry, rising fuel prices have
also wound down the booming airline industry and affected the electric power plants of
the country. The Indian airline industry was flying high but the sudden hike in fuel prices
brought down the faith of other major players in the same field including Air India, Jet
Airways, Kingfisher and Spice Jet. Indian power system also faces a great threat by the

rising oil prices. The major Indian cities like Mumbai and Bangalore are facing frequent
load shedding due to oil shortage. People residing in these cities are facing this problem
of unscheduled long hours of power cut daily. In short, high oil prices have become a pain
at the pumps, in the houses and even in the industries, dictating a heavy loss to the Indian
economy.

When the price of crude oil rises globally, it has a big impact on India, and in particular
its automobile industry. India is the fourth biggest user of crude oil in the world,
importing three-quarters of it, at a huge cost. Between January and October, 2010 India
spent $82.1 billion on crude oil imports. So when the price rises, there is an instant effect
on Indias economy.

A rise in price is transferred to the automobile industries in one of two ways. Either the
price of petrol increases or the government absorbs the price rise, leading to more
subsidies to fuel companies being paid, resulting in a greater fiscal deficit. In turn this
indirectly generates a rise in inflation, and restriction of growth. The Reserve Bank of
India commented on the crude oil price rise, blaming it, along with worldwide uncertainty
and slow economic recovery, for hampering growth in India. Growth for the fiscal year
2011 is only pegged at % by the bank, down from 8.6% the previous fiscal year.

The other impact is more instantly tangible; the rise in petrol prices. The gas prices rose
by 9%, a record rise, and the eighth time since the governments economic reforms which
deregulated gasoline in June 2010. Increased petrol prices see motorists switch to
different forms of transport, from cars to public transport or bicycles, which impacts upon
automobile sales. If the cost of running a car becomes too high, people are happy to
change the way they move about their cities.

Even if the public do not abandon car ownership, perhaps because of fears concerning the
reliability of public transport, people are tempted to change to vehicles which run more
efficiently. This particularly affects automobile companies who create larger and more
powerful vehicles. As mentioned before, India imports the majority of its crude oil. Iran is
the second biggest exporter of crude oil to India, and their imported produce is valued at
$12 billion. However, the United States has claimed the European Iranian Trade Bank,
which handles the transactions, is responsible for financing an Iranian nuclear weapons
programme. As such, the United States does not want India to continue pursuing trade
with the bank. So India needed to find a different way to pay Iran, or find an alternative
solution, to avoid suffering a crude oil shortage and further raised prices.
Crude Oil Price and Commodity Market
This Crude oil pricing mechanism is like the commodity type pricing mechanism. The oil
market developed commodity pricing mechanism in the mid 1980s, replacing the system of
official selling oil prices determined by OPEC. The commodity pricing mechanism in the oil
sector has evolved technically from the spot trading to the future market and financial
derivatives, which are typically found in all commodity market.

Oil is the most important energy source, accounting for more than a third of the world
primary energy mix. It is expected to continue to hold the largest share in the coming
decades, although the share will decline marginally. In volume terms, oil production /
consumption fell after the second oil crisis in 1979 and bottomed in 1983. Since then,
however, the volume has been continuously increasing, despite variations in the price.

Crude oil is a global commodity. It has been traded internationally soon after the modern oil
industry started in Pennsylvania, US, in the 1860s. oil trading has come a long way from the
stable, controlled system of the Majors, which ended in the late 1960s through OPEC s
quota system in the 1970s and the first half of the 1980s to the market mechanism since the
mid 1980s. Crude trading represents the key link between the two poles of the industry:
upstream (Exploration and Production) and downstream (refining and marketing), and crude
prices give signals to both upstream and downstream operations.

The size, scope and complexity of global crude trade are unique among physical
commodities. As of 2011, more than 86 million barrels of oil are produced and consumed
every day. Beyond the scale oil has played a significant role in world history in the 20 th
century. The strategic importance of oil and the crucial role it plays in the economy make oil
a commodity like no other.
The global crude oil market has been in a constant process of transformation. The impact of
burning fossil fuels (including Oil) on the environment became a serious issue in the late
1980s. The rise in terrorism and political uncertainties in the Middle East have revived
supply security concerns. Higher oil prices are encouraging the development of non-fossil
fuels, such as nuclear, fuel cells and biofuels. These and other factors will affect future prices
and pricing mechanisms.
Netback Pricing
Although netback pricing was a brief episode in the history of crude oil pricing mechanisms,
the concept is often used in pricing other fuels than oil, e.g., natural gas. The netback pricing
in the oil sector was developed by Saudi Arabia in 1985. By 1984-85 the official selling price
system, which was the basis for most long term contracts, had broken down. Buyers were
finding the strict conditions
and official prices unacceptable, in the face of a global supply glut. At the time, Saudi Arabia
was acting as swing producer with the OPEC quota system, lowering its production volumes

so that total OPEC production could be kept within the volume to support the prices set by
OPEC. However, under this policy, the countrys production had to be cut back from 10
MBD to 3.5 MBD coming to the lower limit Saudi Arabia had to produce in view of
associated gas needs. In additions, Saudi Arabias efforts were not necessarily shared by the
other OPEC countries. Finally, in 1985 King Fahd decided to increase production and recover
his countrys market share. Netback pricing was introduced as the instrument to implement
this production increase. It proved to be a very effective tool for Saudi Arabia to quickly
regain market share.
The netback pricing formula was;
Crude oil price (FOB) = GPW in the spot market fixed refining margin transportation
costs (from the terminal in the oil-exporting country to the refinery in the oil-importing
country). This netback pricing system introduced the concept of market prices for crude oil,
although it was based on petroleum products.

Netback pricing was also attractive to the buyers (refiners), which otherwise were suffering
from unstable, low margins. However, the success of netback pricing and the increase in
Saudi Arabias production led to a huge drop in oil prices in 1986, plunging below 10$/bbl.
This is sometimes called the counter oil crisis as opposed to the two previous oil crises.
Netback pricing was blamed for the price crash. After a brief period of netback pricing
dominance, the fixed official selling prices returned briefly in late 1987, producing countries
stopped posting the prices in 1988.
Long Term Contract
After the integrated system of the Majors, OPEC developed long-term contracts in the early
1970s. Producing countries took control of the upstream sector and as a result, the oil
industry was transformed. Upstream concessions were replaced by contractual relations and
then expropriated. Contracts were typically FOB priced since tanker transportation remained
with international oil companies (IOCs). New national oil companies were emerging. The
Majors lost control of oil prices, and oil prices were set at OPEC meetings as official selling
prices. This official selling price system lasted until the mid-1980. Against this background
long term contracts offered some degree of supply security.

Long term contracts are widely used in international crude trading today. Although

comprehensive data are scarce, it is thought that more than 50% of internationally traded
crude is under long term contracts. OPEC countries in the Middle East sell their crude
exclusively to refiners through long term contracts. The situation is similar for Russian crude
oil, which is transported to refineries by crude oil export pipeline. The duration of the
contracts is normally one year with renewals, in terms of the trading volumes. For producing
countries, long term contracts guarantee market access for their crude refiners in the
consuming country can enjoy stable supply volumes and crude qualities provided by long
term contracts. On this basis, refiners can optimise their operation by buying residual
volumes through spot trading.
Price Formula
Prior to 1979-80, long-term contracts accounted for most international trade. In the 1970 s
crude was sold at official selling prices, which were set according to differentials to Arabian
Light. The differentials were based on physical properties of the grades and distances to the
markets. However, the official price system, which was the basis for most long-term contracts
then, was no longer working in the mid-1980s, under the decreasing call for OPEC oil due to
increased non-OPEC production and diminishing oil demand in the early 1980s. Saudi
Arabia, which played the role of swing producer within the OPEC quota system, established
the netback pricing system in late 1985 to defend its market share, and abandoned the official
prices. The netback pricing system tied the value of crude oil to the spot market prices of
refined products.
Refining Margins
Refining margins represent monetary gains or losses associated with crude oil processing
operation. To make comparisons possible by crude grade, refinery operation or region,
calculations normally assume standardised refinery configurations. The margin calculation
takes into account wages, construction and other associated costs incurred in refinery
operation, together with variable costs including buying and processing crude oil. Although
margin calculations are more reflective of economics of processing a marginal barrel rather
than returns from base load operation, refining margins can suggest indications of financial
returns to a refinery.

Refining margin = GPW Crude Costs Transport Costs and Applicable fees and
Duties Financial Costs Variable Costs Fixed Costs.

Spot and Futures Markets

The current spot transactions have their origin in the first and second oil crises. The
Organisation of Arab Petroleum-exporting Countries (OAPEC) oil embargo of 1973 and the
Iranian revolution of 1979, sparked fears of a shortage in crude supply.

Crude buyers became nervous and wanted crude at any price. Spot prices rose to higher levels
than the official selling prices and supply volumes under long term contracts shifted to spot
markets. At the same time, rising volumes of new oil production from the non OPEC area
went into the spot markets. Cargoes from the North Sea were sold in the 1980 s exclusively
on a spot basis. Until
1985, most oil-producing countries nevertheless continued to offer long term fixed price
contracts. These contracts increasingly countered resistant from the buyers. Finally, in 1988
long term fixed price contracts ceased to exist after an episode of netback pricing.

Although spot market took over the control of oil prices from OPEC, the task remained in the
late 1980s to organise spot markets, as there were as many spot markets as crude streams.
Gradually Brent and WTI emerged as the two most influential benchmarks. Markets were reorganised in line with these crude grades and the other grades are indexed to them.

At the same time futures markets were being formed in Western countries. There was a desire
on the part of oil companies to reduce risk in light of high volatility after 1973. Developments
in information technology, development in financial theory and a political climate favouring
markets over government administrative guidance led to the creating of financial derivative
markets, Including futures and options.

Oil futures markets are not new. Price volatility in the early days of the US oil industry
resulted in the first oil futures contracts in Pennsylvania in 1860s, which took the form of
pipeline certificates. During the next 30 years, more than 10 exchanges in the US, Canada
and Europe traded crude futures. However, when Rockefeller established monopoly control
and, later, when the Majors controlled the market, prices became more stable, the need for
market risk management disappeared, and the early futures trading disappeared as well.

In 1979 heating oil became the first new futures contract at the NYMEX, and the
International Petroleum Exchange (in London followed in 1981. Gasoline (petrol) futures

trading started on the NYMEX in 1981. WTI trading started in 1983 on the NYMEX and
Brent in 1988 on the IPE. The NYMEX launched natural gas futures in 1990 and the IPE in
1997. The NYMEX still has an open trading floor, called outcry, but it began electronic
trading after hours on NYMEX access in 1993. At IPE, the open outcry system was abolished
in 2005, and now all contracts of the IPE are traded electronically on screen only.

The NYMEX WTI future is the most actively traded commodity in the world some 230 MBD
is currently traded, almost three times as much as the physical oil production / consumption.
The contract trades in units of 1000 barrels and is listed for up to 72 months. The delivery
point is Cushing, Oklahoma. Trading volumes of IPEs Brent futures are around 100 MBD.
Like WTI, Brent contracts are 1000 barrels per unit and listed for up to 72 months. The IPE
has a delivery system called exchange of futures for physicals (EFP). Under this system Brent
contract holders can cancel out a future contract with a physical spot contract. By doing so,
the holders can have the same result as physical delivery of the commodity.
Spot Market
Spot transactions are mainly conducted by telephone or computer network between two
parties. It is an over the counter (OTC) market as opposed to an exchange. Spot markets do
not necessarily have trading floors. The term spot market applies to all spot transactions
concluded in an area where strong trading activities take place. A key advantage of the OTC
market is that the terms of a contract do not have to have the specifications required by an
exchange. A disadvantage is that there is usually a lack of transparency in the market.
Counter party risk also exists in an OTC trade, which is otherwise taken by the exchange.
Spot market participants are refiners and producers where crude oil is concerned. For
petroleum products, buyers are traders or large consumers, and sellers are refiners. Traders
play an essential middleman role. They buy cargoes from sellers and re-sell them to end-users
or other traders. Alongside traders are trading divisions of oil companies.
Spot transactions take place in a similar manner from one market to another, a buyer who
seeks a cargo of crude available within one month contract different producers and traders
working in the area. Negotiations take place normally by telephone. Telephone conversations
are recorded in case of disputes. Payment is made thirty days after loading of the ship for
crude oil (payment deadlines are normally shorter for petroleum products). Spread trading
mechanism governs most crude spot sales, in which negotiation does not centre on the price
in absolute terms but on the price differential between the crude traded and the benchmark.

Prices of North Sea Crude (e.g., Ekofisk or Forties), for instance, are normally indexed to that
of Brent.
Forward Market
Spot trading generated on additional risk of high price volatility. To hedge this risk, forward
and futures markets were established. In Europe, however, crude futures exchange started
trading only in 1988. Instead, forward markets were developed around Brent crude in the
1980s. Therefore, Brent has three price quotations. Spot markets handle cargoes within
fifteen-day availability, called dated Brent while forward markets were developed for more
distant future deliveries, named fifteen day Brent. Brent traded on the IPE futures
markets is called IPE Brent.
The forward fifteen day Brent market has more standardised operation than the spot dated
Brent market. The cargo size is fixed at 500,000 barrels 5%. The delivery takes place at the
Sulom Voe terminal in the North Sea. In the fifteen day Brent trading, only the month of
delivery can be designated (e.g., January, delivery Brent, February delivery Brent, March
delivery Brent, etc.). The buyer specifies the month and the volume and the seller indicates
the delivery date of the cargo at least fifteen days prior. The name came from this practice.
When a fifteen day Brent cargo is name and dated, it becomes a spot dated Brent
transaction. In addition to the Brent crude, there are forward markets of gasoline (Petrol),
Diesel, Kerosene, Naphtha and heavy Fuel Oil in Europe.

Forward contracts are in between spot and futures contracts (Table 7.9). In a hedging
operation, a position is taken in the forward market in an opposite direction to a position in
the physical market. However, speculation also takes place in the forward market, when an
operator takes a position in order to gain profit from price fluctuation. A cargo of crude oil
can be transferred from one trader to another many times between loading and delivery.
Series of consequential transactions in the forward market are called Daisy Chains. Most
transactions are cancelled out by reversed transactions.
Futures Market and Option market
Futures and Option markets have grown considerably since the mid-1980s. Oil companies
and traders as well as financial institutions use the futures and option markets for hedging
against the risk of price fluctuations and risk management.
Table 7.9.3 Characteristics of Spot / Forward / Futures / Options Deals

Contract

Spot

Forward

Futures

Options

Trading

OTC

OTC

Exchange

OTC/Exchange

Derivatives

No

Yes

Yes

Yes

Delivery

Yes

Yes

No

No

Technical analysis:Analysis of International Crude Oil Price.

Oil has become a global commodity and in this global market place, there have been
fundamental changes which will have a large impact on the future price of
oil. On the supply side, the main concern is the availability of crude oil at affordable price.
On demand side, global composition of demand is shifting away from the advanced
economies in Europe, Japan and North America towards developing economies, especially
those in Asia. This means the impact in US in determining oil price is becoming less and less
of a factor.
The critical role played by crude oil, events in the oil market has a major impact on overall
economy. Between 1945 to 1972 oil prices, as measured by West Texas Intermediate (WTI),
were essentially flat and ranged from $2 to $3 a barrel. Then, the world economy faced two
major oil shocks in 1973-74 and 1979-80, both of which were largely due to cutbacks/supply
disruption in OPEC production. In 1973-74, oil prices rose from $2-$3 a barrel to about $11$12 a barrel and then in 1979-1980 they spiked up again to about $39 a barrel. During both
oil shocks, the US and much of the global economy moved into recession and unemployment
rate rose sharply. Oil prices peaked in April1980 at $39.50 a barrel and then steadily
declined for almost 20 years, until they bottomed out in December 1998 at $11.28 a barrel.
This 20-year period of fall in prices set the stage for the price surge over the past decade.
Investments in the oil industry became unprofitable and there was no longer much of an
incentive for consumers to conserve energy. As a result, oil companies cut back on their
capital budgets and oil rig counts and drilling activity fell sharply. The relatively low price of
oil at the pump encouraged consumers to buy less fuel-efficient vehicles and bigger homes.
Crude prices starting edging up again at the end of

1990s, but the upward price spike did not become noticeably pronounced until late 2003,
with oil prices rising sharply between 2003 and 2008 and reaching a peak of over $148 a
barrel in July 2008.

Plot of International Crude Oil Prices

Exponential smoothing of Crude oil prices:-

4000
3500
3000
SMA (3)

2500

BB- Upper

2000

BB- Lower

1500

Close(Rs)

1000
500
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Interpretations:As per the above data and graph of crude oil of closing prices shows that BB upper line stays
at top around 3600 and it comes down to 2900 on 18 th December which shows very less
changes in the upper line of crude oil. The lower bb line is at lower side of above lines.
The graph shows that there not much changes or fluctuations in lower bb, upper bb, SMA (3)
and closing rate of the crude prices which only comes down around below 3000.
KARL PEARSON'S CORRELATION COEFFICIENT (r):--The Karl Pearson correlation coefficient (r) is used to measure the correlation between
variables X (Crude oil price) and Y (Wholesale price index or WPI). The Karl Pearson
coefficient is designated by the letter "r" and is sometimes called "Pearson's r." Pearson's
correlation reflects the degree of linear relationship between two variables. It ranges from +1
to -1. A correlation of +1 means that there is a perfect positive linear relationship between
variables. A correlation of -1 means that there is a perfect negative linear relationship
between variables. A correlation of 0 means there is no linear relationship between the two
variables.
Mathematical Formula:-The quantity r, called the linear correlation coefficient, measures the strength and the
direction of a linear relationship between two variables. The linear correlation coefficient is
sometimes referred to as the Pearson product moment correlation coefficient in honor of its

developer Karl Pearson.

The mathematical formula for computing r is:

Where, N

= numbers of the observations

XY = Sum of the products of paired variables.

X = Sum of X variables
Y = Sum of Y variables
X = Sum of squared X variables.
Y = Sum of squared Y variables.

Table- 8.1

April,2004
05
May
June
July
August
September
October
November
December
January
February
March
April,2005
06

WPI
monthly
(Y)

Crude
Price $,
(X)

(XY)

(X)

(Y)

151.7
151.8
152.7
153.1
153.4
154.7
157.9
158.2
158.5
158.6
158.6
159.1

22.51
26.60
28.49
27.26
28.46
31.34
30.50
30.92
23.25
24.02
25.92
23.82

3414.77
4037.88
4350.42
4173.51
4365.76
4848.30
4815.95
4891.54
3685.13
3809.57
4110.91
3789.76

506.70
707.56
811.68
743.11
809.97
982.20
930.25
956.05
540.56
576.96
671.85
567.39

23012.89
23043.24
23317.29
23439.61
23531.56
23932.09
24932.41
25027.24
25122.25
25153.96
25153.96
25312.81

159.9

24.82

3968.72

616.03

25568.01

May
June
July
August
September
October
November
December
January
February
March

160.3
160.8
161.1
161.7
161.7
162.5
162.3
161.8
161
160.8
161.9

26.95
26.63
23.99
25.01
24.79
20.05
18.24
18.24
18.92
19.55
23.31

4320.09
4282.10
3864.79
4044.12
4008.54
3258.13
2960.35
2951.23
3046.12
3143.64
3773.89

726.30
709.16
575.52
625.50
614.54
402.00
332.70
332.70
357.97
382.20
543.36

25696.09
25856.64
25953.21
26146.89
26146.89
26406.25
26341.29
26179.24
25921.00
25856.64
26211.61

April,2006
07
162.3
May
162.8
June
164.7

25.03
25.00
24.05

4062.37
4070.00
3961.04

626.50
625.00
578.40

26341.29
26503.84
27126.09

July
August
September
October
November
December
January
February
March
April,2007
08
May
June
July
August
September
October
November
December
January
February
March
April,2008
09
May
June
July

165.6
167.1
167.4
167.5
167.8
167.2
167.8
169.4
171.6

25.18
25.86
27.49
26.90
23.68
27.11
29.59
31.26
28.83

4169.81
4321.21
4601.83
4505.75
3973.50
4532.79
4965.20
5295.44
4947.23

634.03
668.74
755.70
723.61
560.74
734.95
875.57
977.19
831.17

27423.36
27922.41
28022.76
28056.25
28156.84
27955.84
28156.84
28696.36
29446.56

173.1
173.4
173.5
173.4
173.7
175.6
176.1
176.9
176.8
178.7
179.8
179.8

24.21
25.00
26.42
27.46
28.66
26.27
28.45
28.20
28.97
30.01
29.61
32.21

4190.75
4335.00
4583.87
4761.56
4978.24
4613.01
5010.05
4988.58
5121.90
5362.79
5323.88
5791.36

586.12
625.00
698.02
754.05
821.40
690.11
809.40
795.24
839.26
900.60
876.75
1037.48

29963.61
30067.56
30102.25
30067.56
30171.69
30835.36
31011.21
31293.61
31258.24
31933.69
32328.04
32328.04

180.9
182.1
185.2
186.6

32.36
36.09
34.22
36.35

5853.92
6571.99
6337.54
6782.91

1047.17
1302.49
1171.01
1321.32

32724.81
33160.41
34299.04
34819.56

August
September
October
November
December
January
February
March
April,2009
10
May
June
July
August
September
October

188.4
189.4
188.9
190.2
188.8
188.6
188.8
189.4

40.53
39.15
43.37
38.82
36.85
41.00
42.58
49.27

7635.85
7415.01
8192.59
7383.56
6957.28
7732.60
8039.10
9331.74

1642.68
1532.72
1880.96
1506.99
1357.92
1681.00
1813.06
2427.53

35494.56
35872.36
35683.21
36176.04
35645.44
35569.96
35645.44
35872.36

191.6
192.1
193.2
194.6
195.3
197.2
197.8

49.43
47.02
52.72
55.01
60.03
59.74
56.28

9470.79
9032.54
10185.50
10704.95
11723.86
11780.73
11132.18

2443.32
2210.88
2779.40
3026.10
3603.60
3568.87
3167.44

36710.56
36902.41
37326.24
37869.16
38142.09
38887.84
39124.84

November
December
January
February
March
April,2010
11
May
June
July
August
September
October
November
December
January
February
March
April,201112
May
June
July
August
September
October
November
December
January

198.2
197.2
196.3
196.4
196.8

53.31
55.05
60.61
58.95
60.01

10566.04
10855.86
11897.74
11577.78
11809.97

2841.96
3030.50
3673.57
3475.10
3601.20

39283.24
38887.84
38533.69
38572.96
38730.24

199
201.3
203.1
204
205.3
207.8
208.7
209.1
208.4
208.8
208.9
209.8

67.06
67.33
66.90
71.29
70.87
60.94
57.26
57.80
60.34
52.62
56.49
60.26

13344.94
13553.53
13587.39
14543.16
14549.61
12663.33
11950.16
12085.98
12574.86
10987.06
11800.76
12642.55

4497.04
4533.33
4475.61
5082.26
5022.56
3713.68
3278.71
3340.84
3640.92
2768.86
3191.12
3631.27

39601.00
40521.69
41249.61
41616.00
42148.09
43180.84
43555.69
43722.81
43430.56
43597.44
43639.21
44016.04

211.5
212.3
212.3
213.6
213.8
215.1
215.2
215.9
216.4
218.1

65.48
65.76
68.10
72.58
68.97
74.78
79.33
89.15
87.92
89.52

13849.02
13960.85
14457.63
15503.09
14745.79
16085.18
17071.82
19247.49
19025.89
19524.31

4287.63
4324.38
4637.61
5267.86
4756.86
5592.05
6293.25
7947.72
7729.93
8013.83

44732.25
45071.29
45071.29
45624.96
45710.44
46268.01
46311.04
46612.81
46828.96
47567.61

February
March
April,2012
13
May
June
July
August
September
October
November
December
January
February
March
April,2013
14
May
June
July
August
September
October
November
December
January
February
March
April,2014
15
May
June
July

219.9
225.5

92.16
99.76

20265.98
22495.88

8493.47
9952.06

48356.01
50850.25

228.5
231.1
237.8
240
241.2
241.5
239
234.2
229.7
228.9
227.6
228.2

105.77
120.91
129.72
132.47
113.05
96.81
69.12
50.91
40.61
43.99
43.22
46.02

24168.45
27942.30
30847.42
31792.80
27267.66
23379.62
16519.68
11923.12
9328.12
10069.31
9836.87
10501.76

11187.29
14619.23
16827.28
17548.30
12780.30
9372.18
4777.57
2591.83
1649.17
1935.12
1867.97
2117.84

52212.25
53407.21
56548.84
57600.00
58177.44
58322.25
57121.00
54849.64
52762.09
52395.21
51801.76
52075.24

231.5
234.3
235
238.7
240.8
242.6
242.5
247.2
248.3
250.5
250.5
253.4

50.14
58.00
69.12
64.82
71.98
67.70
73.06
77.39
75.02
76.61
73.69
78.02

11606.39
13590.19
16242.09
15473.63
17332.59
16424.42
17718.09
19131.02
18626.53
19190.51
18460.42
19769.84

2513.58
3364.39
4776.92
4202.23
5181.00
4583.51
5338.39
5989.35
5627.43
5868.91
5430.85
6086.86

53592.25
54896.49
55225.00
56977.69
57984.64
58854.76
58806.25
61107.84
61652.89
62750.25
62750.25
64211.56

257.5
260.4
259.8
262.5

84.08
76.16
74.33
73.54

21651.05
19832.44
19311.22
19305.05

7069.74
5800.56
5525.11
5408.58

N = 124

24337.1

66306.25
67808.16
67496.04
68906.25
4894250.0
6,226.73 1303113.23 393668.43
7

To determine the influence of crude oil price on inflation of the Indian economy.
The following time series regression equation was fitted.
Yt= a + bX + et ---------- (1) Where
Yt denotes the WPI ( base year 1993- 94 )
a denotes constant quantity, i.e. the intercept of the line on Y- axis. b denotes
the co-efficient of X.
X denotes the crude oil price.( monthly Indian basket price). et is
residual term of the model.

We shall now briefly discuss the mechanics of the Model - 1, two variable linear regression,
the equation of the model is Y= a + bx + et , the scatter plot of X= crude oil price and Y= WPI
monthly is shown in the graph 8.2.
The observed data are used to estimate the two parameters, a and b of the model and e t
is the stochastic term or noise. The actual numerical estimates of the intercept and the slope
are written as a^ and b^ , where the hats indicate that the quantity is an estimate of a
model parameter an estimate that is computed from the observed data.
The above equation can be written as Y=a+bX, in absence of error term, i.e. et=0. In the
equation, the parameter a is the intercept, it gives the quantity of wholesale price index
(WPI) without the influence of crude price, i.e. when X=0, and Constant b is the coefficient of Y in relation to X or the slope.
The slope, a summary of the relationship between X and Y, answers the equation, when X
changes by one unit, by how many units does Y change? The answer is that Y changes by b

units. In the research of the impact of crude oil prices (Indian basket) on WPI (wholesale
price index), the fitted line with the observed data is shown in the graph.

The equation, WPI = 146.0375 + 1.00027*Crude oil price, fits the relationship between the
incremental increase in WPI on the incremental increase of crude oil price. The estimated
slope, b^, is 1.00027; that is,
Changes in Y
Change in percent of WPI
b^ = ---------------------- = -------------------------------------------------- = 1.00027
Changes in X
Change in percent of crude oil price

This means that a 1% change in crude oil price was typically accompanied by a change of
1.00027% of WPI. Thus an increase of only 1% in crude oil price would increase
substantially in WPI. Of course, it works in other way, too; a drop of 1% of crude oil price is
associated with decrease of 1.00027% of WPI. The estimate of slope measures what is call
swing ratio the swing or change in WPI for a given change in crude oil prices.
It can be seen from graph above that total change in Y is not explained by a change in X. The
regression line can explain the total change in Y in response to change in X only if the entire

crude oil price & WPI points fall on the regression line. But, as is evident from the graph, all
crude oil price & WPI combination points do not fall on the regression line. Some points are
placed above and some points are placed below the regression line. This means that b, i.e. the
slope of the regression line, does not explain the total change in Y in response to a change in
X. The unexplained part of Y is called the error term, the residual or the disturbance. The
purpose of regression technique is to find the average values of a and b which make the
values of observed pairs of X and Y, i.e.(X1,Y1), (X2,Y2), etc., as close to the regression line as
possible. The line so fitted is called the best fit regression line. This objective is achieved by
minimizing the error terms, i.e., the deviation of observed value of Yt (tth value, t=
1, 2, 3, n) from its estimated value Y t^ can then be defined as error term, therefore, error
term is, et = Yt Yt^.
Regression technique minimizes the error term with a view to find the best fits the observed
data. So the problem is how to minimize the error term. It can be seen from the graph of the
fitting line that the error terms in some months are positive as the points are above the line
and in some months they are negative. So, one way to minimize the error could be to find the
sum of the error terms. In this method positive and negative errors would tend to cancel out.
It would mean error does not exist or there are no deviations from the estimated line whereas,
it can be seen in graph, the positive and negative error term may not cancel out. Therefore,
the sum of the error terms cannot be used as a measure of deviation of the observed data from
the estimated one. This problem is avoided by using the square of the error term. The
technique that regression analysis uses to minimize the error term is called Ordinary Least
Square (OLS) method. It is the sum square of the error terms that regression techniques seek
to minimize and find the values of a and b that produce best fit line.
Two variable regression

April,2004-05
May
June
July
August
September
October
November
December
January

Yt

Xt

Xt Yt

Xt

WPI
monthly
151.7
151.8
152.7
153.1
153.4
154.7
157.9
158.2
158.5
158.6

Crude Price $
22.51
26.6
28.49
27.26
28.46
31.34
30.5
30.92
23.25
24.02

3414.77
4037.88
4350.42
4173.51
4365.76
4848.3
4815.95
4891.54
3685.13
3809.57

506.70
707.56
811.68
743.11
809.97
982.20
930.25
956.05
540.56
576.96

February
March
April,2005-06
May
June
July
August
September
October
November
December
January
February
March
April,2006-07
May
June
July
August
September
October
November
December
January
February
March
April,2007-08
May
June
July
August
September
October
November
December
January
February
March
April,2008-09
May
June
July
August
September
October
November
December

158.6
159.1
159.9
160.3
160.8
161.1
161.7
161.7
162.5
162.3
161.8
161
160.8
161.9
162.3
162.8
164.7
165.6
167.1
167.4
167.5
167.8
167.2
167.8
169.4
171.6
173.1
173.4
173.5
173.4
173.7
175.6
176.1
176.9
176.8
178.7
179.8
179.8
180.9
182.1
185.2
186.6
188.4
189.4
188.9
190.2
188.8

25.92
23.82
24.82
26.95
26.63
23.99
25.01
24.79
20.05
18.24
18.24
18.92
19.55
23.31
25.03
25
24.05
25.18
25.86
27.49
26.9
23.68
27.11
29.59
31.26
28.83
24.21
25
26.42
27.46
28.66
26.27
28.45
28.2
28.97
30.01
29.61
32.21
32.36
36.09
34.22
36.35
40.53
39.15
43.37
38.82
36.85

4110.91
3789.76
3968.72
4320.09
4282.1
3864.79
4044.12
4008.54
3258.13
2960.35
2951.23
3046.12
3143.64
3773.89
4062.37
4070
3961.04
4169.81
4321.21
4601.83
4505.75
3973.5
4532.79
4965.2
5295.44
4947.23
4190.75
4335
4583.87
4761.56
4978.24
4613.01
5010.05
4988.58
5121.9
5362.79
5323.88
5791.36
5853.92
6571.99
6337.54
6782.91
7635.85
7415.01
8192.59
7383.56
6957.28

671.85
567.39
616.03
726.30
709.16
575.52
625.50
614.54
402.00
332.70
332.70
357.97
382.20
543.36
626.50
625.00
578.40
634.03
668.74
755.70
723.61
560.74
734.95
875.57
977.19
831.17
586.12
625.00
698.02
754.05
821.40
690.11
809.40
795.24
839.26
900.60
876.75
1037.48
1047.17
1302.49
1171.01
1321.32
1642.68
1532.72
1880.96
1506.99
1357.92

January
February
March
April,2009-10
May
June
July
August
September
October
November
December
January
February
March
April,2010-11
May
June
July
August
September
October
November
December
January
February
March
April,2011-12
May
June
July
August
September
October
November
December
January
February
March
April,2012-13
May
June
July
August
September
October
November

188.6
188.8
189.4
191.6
192.1
193.2
194.6
195.3
197.2
197.8
198.2
197.2
196.3
196.4
196.8
199
201.3
203.1
204
205.3
207.8
208.7
209.1
208.4
208.8
208.9
209.8
211.5
212.3
212.3
213.6
213.8
215.1
215.2
215.9
216.4
218.1
219.9
225.5
228.5
231.1
237.8
240
241.2
241.5
239
234.2

41
42.58
49.27
49.43
47.02
52.72
55.01
60.03
59.74
56.28
53.31
55.05
60.61
58.95
60.01
67.06
67.33
66.9
71.29
70.87
60.94
57.26
57.8
60.34
52.62
56.49
60.26
65.48
65.76
68.1
72.58
68.97
74.78
79.33
89.15
87.92
89.52
92.16
99.76
105.77
120.91
129.72
132.47
113.05
96.81
69.12
50.91

7732.6
8039.1
9331.74
9470.79
9032.54
10185.5
10704.9
11723.9
11780.7
11132.2
10566
10855.9
11897.7
11577.8
11810
13344.9
13553.5
13587.4
14543.2
14549.6
12663.3
11950.2
12086
12574.9
10987.1
11800.8
12642.5
13849
13960.8
14457.6
15503.1
14745.8
16085.2
17071.8
19247.5
19025.9
19524.3
20266
22495.9
24168.4
27942.3
30847.4
31792.8
27267.7
23379.6
16519.7
11923.1

1681.00
1813.06
2427.53
2443.32
2210.88
2779.40
3026.10
3603.60
3568.87
3167.44
2841.96
3030.50
3673.57
3475.10
3601.20
4497.04
4533.33
4475.61
5082.26
5022.56
3713.68
3278.71
3340.84
3640.92
2768.86
3191.12
3631.27
4287.63
4324.38
4637.61
5267.86
4756.86
5592.05
6293.25
7947.72
7729.93
8013.83
8493.47
9952.06
11187.29
14619.23
16827.28
17548.30
12780.30
9372.18
4777.57
2591.83

December
January
February
March
April,2013-14
May
June
July
August
September
October
November
December
January
February
March
April,2014-15
May
June
July

N=124
Mean

229.7
228.9
227.6
228.2
231.5
234.3
235
238.7
240.8
242.6
242.5
247.2
248.3
250.5
250.5
253.4
257.5
260.4
259.8
262.5
24337.1

40.61
43.99
43.22
46.02
50.14
58.00
69.12
64.82
71.98
67.70
73.06
77.39
75.02
76.61
73.69
78.02
84.08
76.16
74.33
73.54
6226.73

196.27

50.22

9328.12
10069.3
9836.87
10501.8
11606.4
13590.2
16242.1
15473.6
17332.6
16424.4
17718.1
19131
18626.5
19190.5
18460.4
19769.8
21651
19832.4
19311.2
19305.1
1303113

1649.17
1935.12
1867.97
2117.84
2513.58
3364.39
4776.92
4202.23
5181.00
4583.51
5338.39
5989.35
5627.43
5868.91
5430.85
6086.86
7069.74
5800.56
5525.11
5408.58
393668.43

a ={(Xt )2 (Yt) - (Xt)(XtYt)} { N(Xt2 - (Xt)2}

a=146.0376
b={N(XtYt) - (Xt)(Yt)} {N(Xt2) - (Xt)2}
b=1.00027

The Test of Significance of Estimate Parameters

We have estimated the parameters a and b in regression equation of two variable
regression equation and have also discussed the use of the estimated regression to estimate
the value of Y (WPI) for a given amount of crude oil price
(X). The question that now arises is how reliable is the estimated value of coefficient b or
how well does the estimated regression line fit to the observed data? For example, since b =
1.00027, an increase of $1 in crude oil price will cause an increase in WPI of approximately
1.00027. How far is this conclusion reliable? The technique that is used to answer this
question is called test of statistical significance.

The process of a testing of statistical significance begins with making a hypothesis that
estimate b = 0. This is called Null hypotheses. It means assuming that there is no
relationship between Y and X. The task is now to accept or reject the hypothesis. If null
hypothesis is accepted, it means that there is no relationship between Y and X or, in other
words, the variation in Y (WPI) is not explained by the variation in X. On the contrary, if the
null hypothesis is rejected, it means that estimated b 0 and that b > 0 significantly. The task
now is, therefore, to test the null hypothesis. In fact, the task is to find the probability of
rejecting the null hypothesis. The probability of rejecting a hypothesis is known as finding
the level of significance. The rule in this regard is that if the level of significance is 5 per cent
or less, then the hypothesis is rejected. It means that if the level of significance is 5 per cent
or less, then the estimated coefficient b is statistically significant. That is, if estimated
coefficient b is statistically significant at 5 per cent level of significance, then it is concluded
that X ( Crude oil price) is a significant determinant of Y (WPI).

Calculation of Standard Error of Coefficient

Xt
Yt (WPI
(Crude
monthly) Price $) Yt^
April,2004-05
151.7
22.51
May
151.8
26.60
June
152.7
28.49
July
153.1
27.26
August
153.4
28.46
September
154.7
31.34
October
157.9
30.50
November
158.2
30.92
December
158.5
23.25
January
158.6
24.02
February
158.6
25.92
March
159.1
23.82
April,2005-06
159.9
24.82
May
160.3
26.95
June
160.8
26.63
July
161.1
23.99
August
161.7
25.01
September
161.7
24.79
October
162.5
20.05
November
162.3
18.24
December
161.8
18.24
January
161
18.92

168.56
172.65
174.54
173.31
174.51
177.39
176.55
176.97
169.30
170.07
171.97
169.87
170.87
173.00
172.68
170.04
171.06
170.84
166.10
164.28
164.28
164.97

et =Yt Yt^ (Yt Yt^)

-16.86
284.13
-20.85
434.60
-21.84
476.88
-20.21
408.34
-21.11
445.53
-22.69
514.77
-18.65
347.76
-18.77
352.25
-10.80
116.56
-11.47
131.48
-13.37
178.68
-10.77
115.92
-10.97
120.27
-12.70
161.22
-11.88
141.07
-8.94
79.86
-9.36
87.55
-9.14
83.48
-3.60
12.93
-1.98
3.94
-2.48
6.17
-3.97
15.72

Xt = (Xt X)2
767.60
557.69
472.00
526.96
473.30
356.29
388.70
372.32
727.14
686.21
590.27
696.73
644.93
541.29
556.28
687.78
635.32
646.46
909.96
1022.44
1022.44
979.41

February
March
April,2006-07
May
June
July
August
September
October
November
December
January
February
March
April,2007-08
May
June
July
August
September
October
November
December
January
February
March
April,2008-09
May
June
July
August
September
October
November
December
January
February
March
April,2010-11
May
June
July
August
September
October
November

160.8
161.9
162.3
162.8
164.7
165.6
167.1
167.4
167.5
167.8
167.2
167.8
169.4
171.6
173.1
173.4
173.5
173.4
173.7
175.6
176.1
176.9
176.8
178.7
179.8
179.8
180.9
182.1
185.2
186.6
188.4
189.4
188.9
190.2
188.8
188.6
188.8
189.4
191.6
192.1
193.2
194.6
195.3
197.2
197.8
198.2

19.55
23.31
25.03
25.00
24.05
25.18
25.86
27.49
26.90
23.68
27.11
29.59
31.26
28.83
24.21
25.00
26.42
27.46
28.66
26.27
28.45
28.20
28.97
30.01
29.61
32.21
32.36
36.09
34.22
36.35
40.53
39.15
43.37
38.82
36.85
41.00
42.58
49.27
49.43
47.02
52.72
55.01
60.03
59.74
56.28
53.31

165.60
169.36
171.08
171.05
170.10
171.23
171.91
173.54
172.95
169.73
173.16
175.64
177.31
174.88
170.26
171.05
172.47
173.51
174.71
172.32
174.50
174.25
175.02
176.06
175.66
178.26
178.41
182.14
180.27
182.40
186.58
185.20
189.42
184.87
182.90
187.05
188.63
195.32
195.48
193.07
198.77
201.06
206.09
205.80
202.34
199.36

-4.80
-7.46
-8.78
-8.25
-5.40
-5.63
-4.81
-6.14
-5.45
-1.93
-5.96
-7.84
-7.91
-3.28
2.84
2.35
1.03
-0.11
-1.01
3.28
1.60
2.65
1.78
2.64
4.14
1.54
2.49
-0.04
4.93
4.20
1.82
4.20
-0.52
5.33
5.90
1.55
0.17
-5.92
-3.88
-0.97
-5.57
-6.46
-10.79
-8.60
-4.54
-1.16

22.99
55.60
77.03
68.01
29.12
31.66
23.11
37.67
29.67
3.71
35.49
61.43
62.54
10.74
8.09
5.54
1.07
0.01
1.02
10.78
2.57
7.04
3.18
6.98
17.16
2.38
6.21
0.00
24.31
17.64
3.31
17.64
0.27
28.40
34.81
2.40
0.03
35.09
15.08
0.95
31.07
41.79
116.34
73.89
20.57
1.36

940.38
723.91
634.31
635.82
684.64
626.78
593.19
516.45
543.62
704.14
533.87
425.41
359.31
457.34
676.29
635.82
566.23
517.82
464.64
573.39
473.74
484.68
451.37
408.26
424.59
324.20
318.82
199.53
255.86
192.25
93.81
122.45
46.86
129.86
178.64
84.93
58.30
0.89
0.62
10.21
6.27
22.99
96.32
90.71
36.78
9.58

December
January
February
March

197.2
196.3
196.4
196.8

55.05
60.61
58.95
60.01

201.10
206.67
205.01
206.07

-3.90
-10.37
-8.61
-9.27

15.25
107.46
74.06
85.86

23.37
108.04
76.29
95.93

April,2011-12
May
June
July
August
September
October
November
December
January
February
March
April,2012-13
May
June
July
August
September
October
November
December
January
February
March
April,2013-14
May
June
July
August
September
October
November
December
January
February
March
April,2014-15
May

199
201.3
203.1
204
205.3
207.8
208.7
209.1
208.4
208.8
208.9
209.8
211.5
212.3
212.3
213.6
213.8
215.1
215.2
215.9
216.4
218.1
219.9
225.5
228.5
231.1
237.8
240
241.2
241.5
239
234.2
229.7
228.9
227.6
228.2
231.5
234.3

67.06
67.33
66.90
71.29
70.87
60.94
57.26
57.80
60.34
52.62
56.49
60.26
65.48
65.76
68.10
72.58
68.97
74.78
79.33
89.15
87.92
89.52
92.16
99.76
105.77
120.91
129.72
132.47
113.05
96.81
69.12
50.91
40.61
43.99
43.22
46.02
50.14
58.00

213.12
213.39
212.96
217.35
216.93
207.00
203.32
203.86
206.40
198.67
202.55
206.32
211.54
211.82
214.16
218.64
215.03
220.84
225.39
235.21
233.98
235.58
238.22
245.83
251.84
266.98
275.80
278.55
259.12
242.88
215.18
196.96
186.66
190.04
189.27
192.07
196.19
204.06

-14.12
-12.09
-9.86
-13.35
-11.63
0.80
5.38
5.24
2.00
10.13
6.35
3.48
-0.04
0.48
-1.86
-5.04
-1.23
-5.74
-10.19
-19.31
-17.58
-17.48
-18.32
-20.33
-23.34
-35.88
-38.00
-38.55
-17.92
-1.38
23.82
37.24
43.04
38.86
38.33
36.13
35.31
30.24

199.32
146.12
97.18
178.20
135.24
0.65
28.99
27.50
4.01
102.53
40.38
12.14
0.00
0.23
3.45
25.40
1.51
32.95
103.87
373.03
309.19
305.70
335.80
413.18
544.69
1287.56
1443.62
1485.78
321.15
1.89
567.46
1386.54
1852.36
1509.95
1469.06
1305.20
1246.86
914.52

283.74
292.90
278.37
444.13
426.61
115.01
49.62
57.52
102.50
5.78
39.37
100.89
233.00
241.63
319.85
500.17
351.73
603.41
847.65
1515.89
1421.62
1544.84
1759.34
2454.65
3086.30
4997.70
6320.96
6765.79
3948.17
2171.04
357.38
0.48
92.27
38.76
48.94
17.60
0.01
60.65

June
July
August
September
October
November
December
January
February
March

N=124
Mean

235
238.7
240.8
242.6
242.5
247.2
248.3
250.5
250.5
253.4
24337.1

69.12
64.82
71.98
67.70
73.06
77.39
75.02
76.61
73.69
78.02
6226.73

215.17
210.88
218.04
213.76
219.12
223.45
221.08
222.67
219.75
224.08

19.83
393.07
27.82
773.83
22.76
518.08
28.84
831.75
23.38
546.44
23.75
563.98
27.22
741.12
27.83
774.54
30.75
945.31
29.32
859.70
-0.27 36647.60

357.20
213.42
473.66
305.76
522.06
738.50
615.07
696.60
551.25
772.99
80989.69

196.26694 50.21556
Sb = 0.060902
t=b/Sb 16.42426
Now that we have obtained the values of two test-standard error and t-ratio-we use them
finally to test the null hypothesis, that is there is no relationship between Y (WPI) and X
(Crude oil price). To test the hypothesis we need to perform statistical t test, i.e., to
compare the computed t ratio (16.42) with the critical t value with different degrees of
freedom.
The degrees of freedom is equals n k = 124 2 = 122. The critical t values for different
degrees of freedom are given in the t table. The t test is usually performed at 5 per cent
level number 122 under the degrees of freedom. When we link 122 with 5 per cent level of
confidence, under the column 0.05, we get critical t value as 1.96 for the so called two
tailed test. The value of t that we have calculated in our regression analysis is 16.42. This
value of t (i.e., 16.42) far exceeds the critical t value (i.e.. 1.96) at the 5 per cent level of
significance.
Therefore, the null hypothesis that there is no relationship between Y (WPI) and X (Crude
oil price) is rejected. The rejection of null hypothesis at 5 per cent level
of significance means that there is a statistically significant relationship between Y (WPI) and
X (Crude oil price). More precisely, we arrive at the conclusion that we are 95 per cent
confident that there is a statistically significant relationship between Y (WPI) and X (Crude
oil price).
and Crude oil price.
Analysis of Variance

The analysis of variance is a technique to test the overall explanatory power of the regression
equation. For this purpose, the analysis of variance uses the F-statistics or F- ratio. The
formula for computing the value of F statistic is given below.
{(Explained variation) / (k 1)}
F = -----------------------------------------------{(Unexplained variation)/ (N - k)}
Where k= number of estimated parameters, N = number of observations.
The F statistics can also be calculated by the following formula,
R/ (k-1)
F = -----------------------------------------(1 - R)/ (N-k)
The F- statistics is used to test the hypothesis that the variations in the independent variables
(X) explain a significant proportion of variation in dependent variable (Y). The F statistic
so calculated is checked in F-distribution table with respect to degrees of freedom and critical
values. The computerized results also provide the analysis of variance.
(81033.43)/ (2-1)
--------------------------------------- =
269.76

F=

(36647.60) / (124 2)

Similarly, the regression outputs of WPI on Crude oil price using excel software package has
three components:
Regression statistics table or Model Summary
ANOVA table
Regression coefficients table.
INTERPRETATION OF REGRESSION MODEL SUMMARY
Model

R square

Adjusted R
square

0.8298

0.68858

0.68603

Std. Error
of the
estimate
17.3317

Number of
observation
124

The Regression Statistics Table or model summary gives the overall goodness-of-fit
measures: R2 = 0.68. The Correlation between dependent variable Y and independent
variable X is r = (R) =0.8298. The standard error here refers to the estimated standard
deviation of the error term et. It is sometimes called the standard error of the regression. It
equals SQRT (SSE/ (n-k)).
REGRESSION COEFFICIENTS TABLE
Coefficients

Std. Error

t-statistics p-value

Intercept or
(Constant)

Crude_Price

146.0375

3.43148

42.558 4.75E-75

1.000276

0.060901

16.424 1.07E-32

The population regression model is: y = a + bx + e t ; where, the error et is assumed to be

distributed independently with mean 0 and constant variance.
we focus on inference on b, using the row that begins with crude price. Similar interpretation
is given for inference on a, using the row that begins with intercept. The column
"Coefficient" gives the least squares estimates of a and b.
The column "Standard error" gives the standard errors (i.e. the estimated standard deviation)
of the least squares estimate of a and b .
The second row of the column "t Stat" gives the computed t-statistic for H 01: b = 0 against
H11: b 0. This is the coefficient divided by the standard error: here
1.00027 / 0.060901 = 16.42449. It is compared to a T distribution with (n-k) degrees of
freedom where here n = 124 and k = 2.
The column "P-value" gives for crude prices are for H 01: b = 0 against H11: b 0. This equals
the Pr{|T| > t-Stat}where T is a T-distributed random variable with n-k degrees of freedom
and t-Stat is the computed value of the t-statistic given is the previous column. This P-value
is for a 2-sided test. For a 1-sided test divide this P-value by 2 (also checking the sign of the
t-Stat).
A simple summary of the above output is that

 The fitted line is Y = 146.0375+1.00027*X

The slope coefficient has estimated standard error of 0.060901
The slope coefficient has t-statistic of 16.424.
The slope coefficient has p-value of 1.07E-32.
The standard error of the regression is 17.33

Correlation between WPI and Crude oil prices = 0.8298.

R2 = 0.6885 ; Adjusted R2 = 0.6860

The regression model is
Y = 146.0375 + 1.00027X
There is a strong positive correlation between WPI and Crude oil prices.
For deriving elasticity co-efficient of dependent variable, double log natural regression model
was used. One attractive feature of double natural log model is that the slope coefficient b
measure elasticity Y with respect to X, that is percent change of Y for a given percent change
in X.

The regression is carried out using excel software package has three components:
Regression statistics table or Model Summary
ANOVA table
Regression coefficients table.

SUMMARY OF REGRESSION OUTPUT

Regression Statistics
Multiple R
0.886158
R Square
0.785276
Adjusted R
Square
0.783516
Standard Error
0.072439
Observations
124

ANOVA
Regression
Residual
Total

Intercept
Ln( Crude
price)

Significance
df
SS
MS
F
F
1 2.34123705 2.341237 446.1723 1.42584E-42
122 0.64018069 0.005247
123 2.98141774
Standard
Coefficients
Error
4.230286 0.04952673
0.273585

t Stat
P-value
85.4142 1.1E-110

0.0129521 21.12279 1.43E-42

Therefore, the double log regression model shows that the crude oil price elasticity of WPI is
0.27 and it is positively correlated. Thus, our natural log log regression model is,
Ln(Y) = 4.230286 + 0.273585 Ln(X).
Hypothesis:
H01

: Crude oil price plays an

insignificant

role

in rising

WPI of

Indian economy.
H11

Crude oil price plays a

significant

role

in

rising

WPI

of

Indian economy.
In the analysis of data for testing hypothesis 1, We have first calculated Karl Pearson s
correlation co-efficient between crude oil price and WPI. It is found that there is a positive
correlation exist between crude oil price and WPI and value of r =0.829. Then, we have run
first model by considering entire data sets considering 124 observations comprising of WPI
and crude oil price. Table- 9.1 presents the regression results.

Results of regression analysis:Regression Statistics

Multiple R

0.886158237

R Square

0.785276421

Adjusted R Square

0.783516392

Standard Error

0.07243882

Observations

124

N=124, Inflation (wpi) elasticity w.r.t crude oil price =0.27.

Explanation:-Based on the Karl Pearsons correlation co-efficient and the regression
analysis it is evident that there is significant positive correlation between crude oil price and
inflation (WPI) (r = 0.829, R = 0.886, R2 = 0.7852, F =446.17, P = 1.42584E-42), 88% of
variance on WPI is explained by crude oil price.
Discussion & comment:- F-Table value (95% confidence)at (dfn1 = 1, and dfn2 =122) i.e
F0.95(1,122)= 3.89
i.e. tabled F value 5% significance level
Calculated F value= 446.17
FCALCULATED > F0.95(1,122),
Hence, H01 is rejected.
H11 is accepted.
Thus, The Hypothesis H11, Crude oil price plays a significant role in rising
WPI of Indian economy is accepted.

Policy suggestions: The economy should be able to tide over consistent fluctuating oil prices
resulting from global geopolitical situations, by bringing in adequate
measures to sustain the economy
from such crisis.

 The Government should try and introduce ways so that such hike in
prices is not swiftly pass on to the consumers.
The country should be able to increase its own production of crude oil
reserves so that it will not be left dependent on oil producing countries.
While increasing its own reserves, it will not only help the country
become self-sufficient but also help it to save valuable foreign exchange
from leaving the country.
Introduction of CNG driven cars will help to combat high petrol prices.
Use of public transport can be a good way of not being dependent on fuel
prices.
The Government should try to enter into alliances with friendly countries
to try and explore oil in other countries.
The refining capacity of oil should be upgraded by creating more oil
refining centres in the country.

CONCLUSION
One of the most important factors that decide the future of Indian economy is the
price of petroleum products. After all a small increase the price of this has got widespread
impact on the Indian Economy. If the price of petrol increases, it increases the transportation
cost & the cost of various products, thereby making the companies to increase the price of
these products. This causes inflation in the Indian market and the performance of the
economy is affected. Strong economic growth of India and other developing countries in Asia
have increased the demand of petrol and other related essential fuels, which has resulted in

price hike of petrol in India. The solution lies in finding an alternate source of energy.
Though the idea is good it is not a practical approach to this heavily discussed issue.
Another solution that can be implemented is to create awareness among public about the need
to increase the use of public transport. This is only viable solution in front of us.
Energy is the prime mover of economic growth and is vital to the sustenance of a modern
economy. Future economic growth crucially depends on the long-term availability of energy
from sources that are affordable, accessible and environmentally friendly.

References:

Alhajji A. F and Huettner David (2000), OPEC and World Crude Oil Markets from 1973
to 1994: Cartel, Oligopoly or Competitive? The
Energy Journal, Vol. 21(3), pp-31-34
Anderson, R.N. (1998). Oil Production in the 21st Century,
Scientific American, Vol. 278 (3), pp. 8691.

Anderson David R, Sweeney Dennis J, Williams Thomas A(2008), Statistics for

Business and Economics South Western, a part of
Cengage Learning, Third Indian Reprint, pp553.

ADB (2005), The Challenge of Higher Oil Prices, Asian Development Outlook 2005,
Update part-3, pp.66-76.

ASSOCHAM Event (2007), 10th Energy Summit , Indian Oil & Gas Sector-Rising
Business Opportunities pp. 2-5

Banks, Ferdinand E. (2011), Model, Model, Whos Got oil Market Model? Vol.37.(1).
pp8-9.

BAIC Economic Review (2006) The Voice of OECD Business, (The business and
industry advisory committee to the OECD),
Autumn 2006, pp-3-8.

Barsky, Robert B. & Lutz Kilian, (2004), "Oil and the Macro-economy since the 1970s,"
Journal of Economic Perspectives,

WEBSITES:

http://www.businessworld.in/bw/2010_07_02_Indias_Trade_Deficit_Exp
ected_To_Wide n.html
www.opec.org
www.googlescholar.com
http://www.mcxindia.com/