Oil, the Baltic Dry index, market (il)liquidity and business cycles: evidence from net oil-exporting/oil-importing countries

Abstract

The recent financial crisis has made (il)liquidity research more significant than ever. Galariotis and Giouvris (Int Rev Financ Anal 38:44-69, 2015) find evidence that market liquidity may contain information for predicting the state of the economy. Similar to (il)liquidity, oil is an important indicator of the future state of the economy (GDP). We consider five predictive variables, namely national/global illiquidity, foreign exchange, Baltic Dry, and oil. Our findings show that (1) global illiquidity provides greater overall explanatory power compared to national illiquidity (even for developed oil exporters: Norway, Canada, and Denmark). (2) Oil is the most important predictive variable for oil exporters (especially for emerging oil exporters suggesting over-reliance), while Baltic Dry appears to be more important for oil importers. (3) FX has extra power over financial variables mainly for emerging oil exporters. Finally, there is a two-way causality between GDP and our predictive variables: (4) For oil exporters, the two-way causality between oil and GDP remains, while for net oil importers, we observe a one-way causality from GDP to oil.

Revisiting Wti-Brent Spread and its Drivers

“…We found this result intuitive because higher BDI prompts a greater global demand for crude oil, productive capacity, global economic activity, and, consequently, upward pressure on the Brent oil benchmark. Moreover, we also found that during other (specifically unstable economic) episodes as identified by the distinctive quantiles of the WBS (see Table 8), a decreasing BDI would potentially trigger supply gluts in the oil market [135], hence a decreasing price of Brent oil and consequently a higher price spread. Additionally, we employed the Kilian index to evaluate the real global economic activity built upon the single-voyage ocean freight rates for dry bulk commodities used to disentangle demand and supply shocks in the global oil market.…”