The relationship between crude oil and other commodities

Abstract

This thesis analyzes the effect of crude oil on the prices of commodities. The thesis provides an overview of the oil market and of its participants, as well as how the price of crude oil and the commodities is determined and how they are traded. Using a Vector Autoregressive Model (VAR), we were able to analyze the causation relationships between the variables and compare the effect on the different industries and sectors. In order to analyze the effects from the financial crisis we made use of two sample periods, one going from 1994 through June 2008: (1) and the other from 1994 up until today: (2). What we found was that the correlations between the price of crude oil and the commodities were higher in (2) for all but natural gas and iron ore, which decreased severely through the financial crisis. We further found that leading up to the financial crisis most of the agricultural commodities, coal and gold all shared a delayed but significant causation relationship with the crude oil price. In (2) however, only soybeans and rubber of the agricultural commodities proved to have a significant causation relationship with the crude oil price whereas both the metal sector and the energy sector as well as salmon proved to have a significant causation relationship with the crude oil price. In addition, we have analyzed how economic growth affects the price of the commodities to be able to compare this to how the crude oil price affects the price of the commodities.