In recent years, methanol has been proposed as a chemical indicator to assess the aging condition of cellulose insulation in oil-immersed power transformers. However, the formation mechanisms of methanol during cellulose degradation are not clear enough. In this paper, such formation mechanisms were studied using molecular dynamics simulation. Three main formation pathways of methanol were found and discussed. Analysis of the Mayer bonds of cellulose revealed that each atom of cellulose contributes differently to methanol formation. The methylol groups on the 5-carbon atom of the 1-pyran ring and 4-pyran ring of cellulose are more readily detached to form methanol molecules. In addition, changes in the amount of methanol molecule with simulation time were investigated. The results indicated that the separate existence of initial moisture and oxygen has no significant effect on the formation of methanol, while the coexistence of initial moisture and initial oxygen catalyzes the conversion of cellulose degradation products to methanol. The findings reported in this paper can provide a valuable theoretical basis for further studies on methanol as an indicator to evaluate the residual life of cellulose insulation. INDEX TERMS Cellulose, methanol, molecular dynamics, cellulose insulation, formation mechanisms.