The nexus between fossil energy markets and the effect of the COVID-19 pandemic on clustering structures

Abstract

The main purpose of this paper is to analyze price returns series to investigate causality between international fossil energy markets and the effect of the COVID-19 pandemic on their clustering structures. The sample period covers August 1993 to June 2023. The empirical results from Granger causality applied to tests show (i) no evidence of causality in both directions between Australian coal and Brent, and between Dubai crude oil and Australian coal, (ii) evidene of 52 unidirectional causal relationships across international fossil energy markets, and (iii) evidence of bidirectional causality between US gasoline and Brent, South African coal and Australian coal, Indonesian natural gas and Australian coal, Russian natural gas and Australian coal, and between South African coal and Russian natural gas. Besides, results from agglomerative hierarchical clustering show that the COVID-19 pandemic affected the structures in the clusters in fossil energy markets and increased the similarity between them. Overall, we provide insights about the connectedness and clustering among major international fossil energy markets to highlight important system dynamics that could be helpful for policy makers, traders and investors.