Vol. 2, Issue 8 (2015)
Review of oil price volatility and stock returns of oil and gas companies
Author(s): P.A. Donwa, C.O. Mgbame, O.R. Aigboduwa
Abstract: The broad objective of this study is to theoretically examine the effects of oil price volatility on stock returns of oil and gas companies around the world. This study is essentially a library research which was based on empirical literature survey and secondary information. The study started by reviewing the influence of oil price volatility as well as its effects on oil exporting economies. It examined the determinants of oil price volatility which include: flow demand shocks, flow supply shock, the role of expectation in the physical market of crude oil, financial expectations in the oil future markets and the role of OPEC. Various theories associated with oil price volatility were examined. Prior empirical studies on the effects of oil price volatility on oil stocks and the effect of volatility in crude oil prices on stock markets were discussed. It was discovered that there exists significant relationship between oil price and the oil stocks both in the short and long run. Volatility of the stocks of the oil companies is persistently affected by oil price volatility transmission. An upward trend in oil prices leads to higher stock returns of oil and gas companies operating in the upstream sector but there exist a negative relationship between oil price volatility and stock returns of oil and gas companies operating in the downstream sector and many other industries outside the oil and gas sector. The rate of information flow and volatility in oil prices lead to volatility in other markets.