Impact of COVID-19 pandemic on the energy markets

Economic Change and Restructuring https://doi.org/10.1007/s10644-021-09320-0 Impact of COVID‑19 pandemic on the energy markets Imlak Shaikh1 Received: 27 August 2020 / Accepted: 21 January 2021 © The Author(s), under exclusive licence to Springer Science+Business Media, LLC part of Springer Nature 2021 Abstract This article aims to uncover the effects of the COVID-19 pandemic on the energy markets in terms of energy stock indexes, energy futures, ETFs, and implied volatility indexes. We model the volatility of energy markets and demonstrate the effects of various phases of the pandemic outbreak (COVID-19) on the energy market. COVID-19-induced uncertainty indicators like the growth of the infection, economic policy uncertainty (EPU), and infectious diseases market volatility (IDsMV) have shown pronounced effects on energy markets’ historical volatility. The volatility of energy ETFs–stocks appears to be more resilient in line with S&P 500 energy stocks. WTI crude oil market has shown an unprecedented overreaction amid pandemic outbreaks and traded with an extreme volatility level. The investors’ sentiment in the energy market was factually higher on the tail events, indicating that fearful investors rushed toward put options and paid an excess premium to protect from unparalleled risk in the energy market. Keywords COVID-19 · Energy market · ETF · Pandemic · Volatility index · Uncertainty JEL Classification B26 · G12 · G14 · G15 · Q02 · Q43 1 Introduction The outbreak of the pandemic COVID-19 has rapidly disrupted the global supply chain and the economy; eventually, it has led to a dramatic transformation in the energy markets. Yet, it is unpredictable how long the virus outbreak will persist, which has shown its peak in the USA by mid of April 2020. The economic * Imlak Shaikh ; 1 Management Development Institute Gurgaon, Gurugram, Haryana 122007, India 13 Vol.:(0123456789) Economic Change and Restructuring normalcy exclusively depends on the immediate cure or vaccine or herd immunity increase. The analyst and policymakers believe that GDP may take a deep dive in 2020 and rebound in early 2021.1 The demand for energy and supply depends on the persistence of COVID-19 and further the lockdown, unlock and social distancing, and new workplace policy. Moreover, pandemic-induced unemployment is at the peak of about 10%, and further, it may range between 15 and 30% (Figueroa et al. 2020). There have been large swings in the global crude oil prices, it dropped 50–80% in the first quarter of 20202, and a 10% reduction in oil prices has caused approximately a 0.2% diminution in US GDP per year (Balke and Brown 2018). For the first time in the history of oil futures, WTI and Brent in near-term curves have fallen on average 20%, and oil and gas companies face a growing risk of insolvency. Hence, in this work, we aim to present energy markets’ performance amid COVID19 in terms of energy stocks, energy futures, energy EFTs, and energy market sentiment index (VIX). The work’s motivation is to demonstrate how the energy market responds to the recent pandemic outbreak and find the effects of federal support and bailout package on the energy markets. The study’s research questions are as follows: (1) What contains pandemic outbreak COVID-19 for the energy markets? (2) Does WHO announcements and federal support and bailout package matter for the energy trading? (3) Do OVX and OIV are the gauge of investor sentiment in the energy market? IEA (2020) deliberates on the likely impact of COVID-19 and shows the concern about energy security, electricity security, and clean energy transitions in the year 2020. The report’s key finding shows the unprecedented decline of global oil demand by minus 57% and a drop in road transport between 50 and 75%. Cohen (2020) further refers to the IEA report (International Energy Agency) and highlights that it is the first time in the history of seven decades the biggest shock to the global energy market. Future shock implication is awaited. COVID-19 forced the companies, investors, and analysts to drill down to comprehend the tail events. The author notes that the energy market experienced a 6% decline in energy globally after the 2008 crisis. Developed economies are more vulnerable to face a fall of energy demand 9% in the USA and 11% across the EU. Moreover, Rapier (2020) analyzes the IEA outlook for the short-term energy market for 2020–2021. Brent crude oil may rise to $48/b in 2021, global petroleum and liquid fuels demand may experience a considerable amount of volatility, and it may surge by 7.0 million b/d in 2021. Bocca (2020), a member of the World Economic Forum (WEF), explains the COVID-19 shocks to the global economy and energy market. The author considers it an opportunity for a new energy order in a sustainable fashion. COVID-19 crisis allowed more dialogue between the Organization of the Petroleum Exporting Countries (OPEC) and the G20. In order to deal with energy security and economic 1 Baker, S. R., Bloom, N., & Terry, S. J. (2020c). Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments. NBER, http://people.bu.edu/stephent/files/BBT.pdf. 2 Oil and Refined Products Summary, February 1, 2020, through April 3, 2020. S&P Global Market Intelligence, Accessed June 3, 2020. https://platform.marketintelligence.spglobal.com/web/clien t?auth=inherit#markets/OilSummary. 13 Economic Change and Restructuring uncertainty, several negotiations among OPEC + and the G20 are going on, and they are on the consensus to reduce the oil supply. Hence, COVID-19 allowed the ways of deployment of parties with contending interests to work toward the common and best objective of market’s stability (e.g., AleaSoft 2020). The historic decline in the demand for crude oil happened due to slower economic activity, international travel ban, lockdown, and geopolitics of crude oil among Saudi Arabia and Russia and OPEC’s role in crude oil supply. Ramkumar and Hodari (2020) present the current and future crude scenario in the US Shale producers, Brent and WTI prices during the first quarter of 2020; crude oil futures first time fell below $20. Wallace (2020) talks about crude backwardation and contagion effects, the rise in the futures prices near contract expiration. Before the pandemic outbreak, the SPXGSCI commodities index outperformed the SPX500, but commodities are still in contagion and backward state. The price of crude oil WTI to be delivered in May 2020, the first time in the history, traded at minus $5.33 a barrel on April 21, 2020; the settlement price fell to minus $37.63 (see Fig. 2); in particular, this implies that sellers must recompense buyers for taking barrels off their hands.3 Hence, our study contributes to several aspects: (1) energy market performance amid COVID-19 investigated in terms of energy stocks, futures, and ETF. (2) Further, energy traders’ fear and anxiety were measured in terms of OVX and OIV amid pandemic (...truncated)