Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON THE RELATIONSHIP OF WORLD OIL PRICE AND VIETNAMESE OIL COMPANIES STOCK RETURN NGUYEN THI THU HIEN ID No: 22080926 Intake 6 Supervisor: Dr. TRAN MANH HA September 2023 1 EXECUTIVE SUMMARY According to the data of Vietnamese State Stock Center, Vietnamese stock market capitalization was increasing sharply from 2,880,268 billion VND in 2016 to 9,309,889 billion VND in 2021 (over three times rise), compared to GDP in 2016 Vietnamese stock market capitalization to GDP was 68.7%, while in 2021 it was 148. Even though it was decreased in 2022 due to the Covid-19 pandemic and some other domestic macro economics events (such as bond booming and illiquidity of bond market together with the real estate booming), Vietnamese stock market is still expected to be attractive to the foreign investors when its P/E is 12 times, while Thai Land, Philippines, Malaysia or Indonesia is much higher than Vietnam at 16 times, ROE of VN-Index is 15% which is higher than other countries in Asia at 9-10% (source: baochinhphu. The goal of the dissertation is to investigate the interactive relationships between oil price movement and Vietnamese oil companies stock returns.
Using multifactor model for the daily data during the period from 2010:1 to 2022:13 of Brent oil price changes, WTI crude oil price changes, Vietnamese oil companies stock price volatility, Vn-Index stock price risk, and exchange rate risk, it is found that only Brent oil price changes, Vn-Index stock volatility show statistically significant impact on the Vietnamese oil companies stock returns the WTI Crude oil price difference and exchange rate risk do not reveal the significant affect on the Vietnamese oil companies stock returns. Increase in Brent oil price may increase the Vietnamese oil companies’ stock price and Vietnamese oil companies stock returns. This outcome is in line with what is predicted by theory. This suggests that petroleum stocks may be a good hedge against inflation.
As oil prices increased, the Vietnamese stock market grew as well. These results may be useful for individual and institutional investors, and policy makers. 2 ACKNOWLEDGEMENTS This thesis could not been completed without the support and encouragement of my mother and my passed away father, who always support me unconditionally in their own ways. I would like to express my special thanks to my husband for his advocate to take care of my little family and my sweet children.
In addition, I would like to thank all my lecturers of the MSc joined program of Banking Academy of Vietnam and the University of the West of England for their extensive knowledge and skills. Last but not least, I would like to express my sincere thanks to my supervisor, Dr. Tran Manh Ha for his valuable guidance, recommendation and time. 3 TABLE OF CONTENTS EXECUTIVE SUMMARY.
3 TABLE OF CONTENTS. 20 Histogram of IR and VNIR. 20 Time series graphs for variables. 20 Unit root test.
21 Covariance and correlation. 22 Parameter estimate, Durbin-Watson, AR, ARCH, GARCH, RAMSEY RESET. 24 Homoskedasticity and heteroskedasticity. 36 4 INTRODUCTION The world's economy is heavily dependent on crude oil, which is one of the most significant commodities in our economy.
It is nearly hard to find a factor that has a bigger impact on the global economy than oil. Oil price variations cause economic recessions by reducing productivity, driving up inflation, and slowing down economic growth. Costs for transportation and production go up as a result of rising oil prices and rising oil import expenses. Assuming non-energy prices stay constant, this result in increased product prices, which in turn raise inflation.
Due to imbalances in the economy's supply and demand, increased oil prices and oil import costs cause GDP to decline. This, in return, results in lower economic growth and recession. Aside from that, the fluctuation in the price of oil raises risk and uncertainty, which has a negative influence on stock prices and decreases wealth and investment. For at least three reasons, the natural resource industry is a complex one.
First, it requires a lot of capital. Building brand-new mines and pulp mills can cost billions of dollars. Second, the resource base that natural resource corporations depend on is running out. Natural resource extraction firms are constantly looking for low-cost natural resource deposits to exploit in order to replace their dwindling asset base in order to stay in business.
Third, natural resource firms create a pretty uniform product, such as copper, gold, nickel, oil, and pulp. The energy sector has seen particularly difficult times during the past ten years. Global petroleum demand and supply have been impacted by a number of political (the war in Ukraine) and economic (the Covid-19 epidemic) factors. There is a direct effect brought on by Asia's decreased energy demand.
As major consumers of petroleum goods, the Asian nations' declining desire for these products lessened demand globally and subsequently lowered oil prices. Large oil exporters like Russia and Venezuela experience budget deficits and decreased tax revenue as a result of falling oil prices. Investors fleeing risky assets move money into safe havens like US treasury bonds. This will appreciate the US dollar, the denominated petroleum products, leads to consumers outside the US reducing their purchases (Blomberg & Harris, 1995), (Sadorsky, 2000).
Globalization has strengthened interdependencies across all economies in the globe by broadening the flow of products, services, and financial capital across national borders. As a result of the rising importance of emerging economies like Brazil, China, and India, the expansion in global trade is more susceptible to increase in oil costs than in the past. Due to the increased flow of portfolio capital (in the form of stocks, bonds, and mutual funds), both domestic and foreign investors are impacted by the effects of the oil price on emerging stock markets (Basher & Sadorsky, 2006). Additionally, prior experience has demonstrated that the world's poorer nations are significantly more affected by oil price shocks.
Because the cost of importing oil skyrocketed due to the OPEC oil embargo of 1973, developing nations experienced significant economic and 5 social suffering. The price of oil rose from $3 per barrel to $13 per barrel in only a few short months. Developing nations needed loans from international lending institutions like the World Bank and the International Monetary Fund (IMF) in order to carry out their economic development initiatives (Rifkin, 2002). Commercial bank loans to emerging nations surged by 550% between 1973 and 1980.
The second oil price shock of 1979 caused a global recession and made it harder for emerging nations to succeed since the cost of their oil imports increased while the cost of their other export goods decreased. The third world's debt reached $1 trillion by 1985. The issue for the majority of developing nations was that any new borrowing was typically going toward paying off existing debt and purchasing imported oil. There was hardly any money left over for brand-new economic development initiatives.
Today, there is a great deal of anxiety about the connection between high oil costs, high debt, and slow economic growth. In the International Herald Tribune in 2000, Kofi A. Annan, the Secretary General of the United Nations, stated that "debt-servicing costs are likely to increase if higher oil prices lead to higher international interest rates" in the ensuing years (Annan, 2000). Oil is the key material in the modern economies.
Many industries use oil as their important and irreplaceable material, without oil, maybe many manufacturers stop processing and as a supply chain, the whole economy can be disrupted. Especially for industrialization and modernization economy like Vietnam, oil consumption is growing fastest in the region, overtaking China, and rising by 7.5% annually over the last 20 years (according to statement of ANZ Bank on Vietnamnet on 2015). According to worldometer.info, as of 2016, Vietnam oil consumption was 478,000 barrels per day, ranking 34th of the oil consumption on the world, Vietnam oil production was 313,000 barrels per day, ranking 32nd in the world, meaning that domestic oil production was not enough for consumption, because of the high proven oil reserves at 4.4 billion barrels in 2016, ranking 25th in the world, Vietnam was net exporter of oil. However recently, oil production decreased from 17.23 million tons in 2016 to 10.97 million tons in 2021 (according to the report of vnexpress.net), the oil export decreased appropriately from 6.85 million tons in 2016 to 3.1 million tons in 2021, the oil import increased from 0.44 million tons in 2016 to 9.9 million tons in 2021.
So the world oil price fluctuation will significantly affect the domestic market, especially stock market or stock return. The previous researches focused on the developed market such as the US and European countries (Park & Ratti, 2008), (Sadorsky, 2001), (Cong et al. The result is different. Park & Ratti (2008) found that the relationship between oil price and oil-importing countries’ stock market is negative, while the relationship between oil price and oil-exporting countries’ stock market is positive.
Cong et al. (2008) found that oil price shocks do not effect significantly on the stock returns of most Chinese stock market indices. However Narayan & Narayan (2010) found that oil prices had a positive and significantly impact on Vietnamese stock market. This research aims to analyze the relationship between Vietnamese oil companies’ stock return and the world oil price together with some variables such as: VN-Index stock returns, exchange rate from 2010:1 to 2022:13 in the situation that Vietnam is both oil-exporting and oil- importing country.
6 Table 1 (in Appendix page 36) shows data on oil consumption for main areas and selected countries from 2010 to 2021. Asia Pacific showed the sharp increase in oil consumption with 25.54%, while Europe decreased significantly at 9. Compare country to country, Indonesia has decreased 3.86% while Vietnam experienced the strong increased at 29. Table 2 (in Appendix page 39) shows data of oil production for main areas and selected countries from 2010 to 2021.
While Asia Pacific leads the trend of oil consumption, it was near the bottom of oil production. Vietnam increased significantly of oil consumption at 29.61% while decreased sharply in oil production at 39. According to Vietnam Credit research on 2021, Oil and gas was the biggest industry from 2016 to 2020, contributing 10 percent to the country’s GDP. As forecasted by FiinGroup, the oil and gas industry profit after tax will grow by 741 percent in 2021.
The profit growth is predicted to be coming from the “downstream” group, including Binh Son Refining and Petrochemical Joint Stock Company, Vietnam National Petroleum Group, and Vietnam Oil Corporation. Among these, Binh Son Refinery and Petrochemical have fulfilled 213 percent of the annual profit plan in the first quarter. Meanwhile, most enterprises in the “midstream” group have planned to reduce profits sharply in the context that oil and gas exploitation in Asia has not been accelerated, despite rising oil prices. In 2010, Vietnamese oil import was only USD0.5m, one sixteenth of export value.
But in 2020, oil import was nearly USD12m (increased sharply 24times) and nearly 3 times higher compare to the oil export value. In 2021, the oil import and export value was decreased respectively but oil import value was still 3 times higher than the oil export value. According to Vietnam General Customs Office, in 2022, the percentage of oil export is 0.61% in total export value of Vietnam, the percentage of oil import is 2.16% in total import value of Vietnam as described in table 3 in the Appendix. The question is that Vietnam was on down trend in oil production while on up trend in oil consumption.
As a result, Vietnam has to import oil to meet the domestic demand. And the world oil price surely has the impact on the Vietnam economy in general and Vietnam stock market in particular. Oil price fluctuation can lead to the uncertainty in the input expenses such as transportation and logistics.