Correlation Between Oil and Gold Silver Using Regression Analysis

The oil price collapse between June 2014 and January 2015 was the third largest of the past 30 years and was driven by a combination of few conditions. (Kose, Ohnsorge, Stocker, 2015). It fell by about 50 percent between those periods and consisted of several phase. Initially, in June 2014, the oil price of Brent oil drops from $110 per barrel to $80 per barrel before the OPEC meeting in late November. The second phase of oil price drop occur in the early of January 2015, where oil price drops to below $50 per barrel. This drop however was recovered slightly on May 2015, when oil price rise to about $65 per barrel. After the OPEC meeting, the price of oil was adjusted rapidly to about $70 to $75 per barrel, and have remained between this price value until January 2015 (Husain, Arezki, Breuer, Haksar, Helbling, Medas, Sommer, and an IMF Staff Team, 2015). (Figure 1) (See Apendix A for more information regarding oil price drop)

Despite some contradictory signs, oil prices have been gaining steadily based on reports that U.S. oil inventories have dropped and concerns about production disruptions in both China and Nigeria. A report from cnbc.com speculates that economic weaknesses and contradictory signals about the dollar 's strength won’t significantly impact the trend of rising oil prices. Often linked to inflation and higher interest rates, oil prices have narrow windows for growth where they can exert positive influences on economic conditions but a wider range where economic instabilities occur. This is especially true in the current market where long-term prospects

When considering how the price of crude oil and its by-products are determined, one must first look at the

Lastly, the rise of oil price has also led to the rise of other raw materials prices such as precious metal price and water price. Mutually, the rise of other raw materials prices have also led to the rise of oil price. It is into a mutual cycle affecting each other since it requires water and precious metal to produce oil, and it requires oil and precious metal to produce water, and the same for all commodities. This obviously will drive the oil price to sky-rocket if situation is worse enough, and very likely it’ll be.

This paper seeks to examine the relationship between oil prices, exchange rates and stock prices of these two countries through a financial market perspective. The gravity and intensity of which contains invaluable information for investors, corporations, policy makers and governments.

Since summer 2014, the price of oil in the global market has drastically fallen. As measure by the U.S dollar, oil price has declined by around 50 percent from last year. The declining oil price is widely deemed as the effects of the increasing oil supply and decreasing demand in the global market among other factors. Future pricing predictions indicate that the price of oil will hardly be restored the level it was in recent years. The focus of this paper is to describe how the basic supply and demand mechanism has contributed to the decline in global oil prices and the subsequent effects of the prices on various national economies.

Shocks to the demand and supply of oil, caused by politics, business changes and cycles, and technological advances, cause oil price volatility across world economies. These factors explain the fluctuations that the global oil industry has faced since early 1990s (Aasim, 2015: 5). The economic boom between 2003 and 2008 caused an increase in oil prices, especially in oil-consuming economies such as India and China. On the contrary, petrol exporting nations could not match the high demands for oil. Oil prices increased during the 2008 financial crisis, picking up again in mid-2009 after the developing economies showed signs of economic growth. Oil supplies would later be disrupted by the Arab Spring uprisings in 2010 after which oil prices rose up to between $90$ and $120 per barrel between 2010 and 2014 (Baumeister & Kilian, 2016: 54). As supply exceeded the demand, oil prices would drop by 70% between June 2014 and January 2016. Thus report discusses the effects of oil prices on the aggregate demand and aggregate supply of a petrol importing nations.

There are various empirical literatures, investigating the relationship between oil price variations and economic growth. The existence of a negative relationship between macro-economic activities and oil prices has become widely accepted especially after Hamilton’s 1983 work. He pointed out that increase in oil prices, reduced US output growth from 1948 to 1980. Hamilton's findings have been confirmed and extended by many authors and researcher. Hooker (1996) confirmed and extended Hamilton’s work for the period 1948 to 1972 and demonstrated that the oil price level and its changes do reflect the influence on GDP growth. This is shown in the third and fourth quarters after the shock that rise of 10% in oil prices lead to a GDP growth decrease of approximately 0.6 %. Accordingly, Lee et al. (1995) Mork (1989), and Hamilton (1996) presented the non-linear transformations of oil prices to re-establish the negative association between oil prices increases and economic decline, as well as these researchers also analyzed Granger causality between both variables. The result of Granger causality test proved that oil prices Granger cause U.S. economy before 1973 but no

There are various empirical literatures, investigating the relationship between oil price variations and economic growth. The existence of a negative relationship between macro-economic activities and oil prices has become widely accepted especially after Hamilton’s 1983 work. He pointed out that increase in oil prices, reduced US output growth from 1948 to 1980. Hamilton's findings have been confirmed and extended by many authors and researcher. Hooker (1996) confirmed and extended Hamilton’s work for the period 1948 to 1972 and demonstrated that the oil price level and its changes do reflect the influence on GDP growth. This is shown in the third and fourth quarters after the shock that rise of 10% in oil prices lead to a GDP growth decrease of approximately 0.6 %. Accordingly, Lee et al. (1995) Mork (1989), and Hamilton (1996) presented the non-linear transformations of oil prices to re-establish the negative association between oil prices increases and economic decline, as well as these researchers also analyzed Granger causality between both variables. The result of Granger causality test proved that oil prices Granger cause U.S. economy before 1973

Empirical studies on the relationship between crude oil prices and stock market returns date all the way back to the early 1970’s. Jones and Kaul (1996) have found a negative relationship between the oil prices and stock market returns. (Nandha and Faff, 2008; Sadorsky, 2001) Supports the fact that oil price changes also have been seen to have a positive effect on oil and gas industry returns. There have been many variables affecting the way in which this correlation is looked upon. Narayan and Sharma (2011) have studied the relationship between stock return and the oil price shocks based on firm sizes. Tsai (2015) has studied U.S how U.S stock returns respond differently to oil price shocks pre-crisis, within the financial crisis, and post financial crisis. However, based on the specific time period Kilian and Park (2009) found that the effect of the stimulus package dominated the effect of oil price shocks and provided evidence that the U.S stock market was still thriving, representing a positive relationship between crude oil prices and stock market returns. An economy with higher oil prices, increase the discounted value of cash flows of oil firms, assuming these prices are able to be passed onto customers.

There has been a sharp drop in the prices of oil. Over the past decade there has been a recurrent drop that has been recorded. Estimated the place effect has been in the range of 0.5 to 1 %( dadush 2015) the drop in the prices has have caused contending large deficits in many countries especially those which receive oil exports. The effects are both negative and positive depending on the boost of the global aggregate demand. Non OPEC countries have had the opportunity to have the eventual decision to enable the price to align according to the global economy

In his book, Black Gold: The story of Oil in our lives, Albert Marrin said, “By the fall of 1918, it was clear that a nation’s prosperity, even its very survival depended on securing a safe, abundant supply of cheap oil.” Crude oil is one of, if not the most important commodity in the world. And it has become something that is highly tied to the global economy as a result. The rise and fall of oil prices are used as indicators of what’s to come and how to prepare for it. The very prosperity of some nations is directly indeed directly tied to oil production or procurement. In this paper, I will be discussing the effects of oil surplus and shortage on the economy as well as the effect of oil prices as well. I will also be looking at the effect of recent development, new technology and oil substitutes on the industry and the economy by extension.

This second category is factors that affect the the supply of oil, this is further split into two categories, factors that impact the level of supply, this can take the form of geopolitical risks, production capacity and the size of oil reserves. These are often partly mitigated by increasing technological progress and efficiency. The second category is factors such as economic exploration, market tightness and market structure which alter the responsiveness of supply to changing prices. Finally the role of financial markets in affecting the oil price is a key influencer, this is seen through hedging activity, speculation and the USD exchange rate. There is no universal consensus about which of these categories is the primary driver in oil prices or unified theory regarding the debate to whether fundamentals or expectations play more of a role. Work by Hamilton and Fattouh argue that the main price drivers are fundamentals while Cifarelli and Paladino conclude that a significant role is played by speculation, Kaufmann take the middle ground arguing that both contribute to changes in the price of oil.

Hamilton (1983) stated that the correlation between oil price evolution and economic output was not of a historical coincidence for the 1948-72 period. An increasing oil price was followed 3-4 quarters later by slower output growth with a recovery beginning after 6-7 quarters. These results also apply to the period 1973-1980. The negative effect is more distinct in inflationary times. It wouldn’t have been possible to anticipate these reductions in real GNP growth on the basis of the previous situation of output, prices, or money supply. In general, Hamilton’s results have been confirmed by several subsequent studies. In 1986, Gisser and Goodwin indicated for the analyzed period from 1961 to 1982 that the oil price hadn’t lost its potential to predict GNP growth.

It goes into the relationship between oil prices and macroeconomic fundamentals, including economic output and value and volume of international