THE EFFECT OF COMMODITY PRICE CHANGES ON FINANCIAL PERFORMANCE OF OIL FIRMS

Abstract

Prices of oil and gas are generally known to be highly volatile and the recent price changes have caused several concerns for consumers, corporations and countries alike as they experience high dependency on oil and gas for transportation, electricity generation and industrial production. The specific objective of the study was to investigate commodity price changes effect on financial performance of the oil and gas sector. In so doing, data was sourced from active oil and gas firms quoted in the African Stock market. Panel data regression using Hausman’s fixed effect and random effect models was adopted. However, the study also conducted other diagnostic tests like multicollinearity test using Variance inflation factor, Heteroscedasticity test, correlation analysis. Findings showed that Commodity price change has negative but statistically significant effect on the financial performance of the African listed oil and gas firms at 1% level and that more profits were made during the period of fall in price of commodities, possibly because of higher demand in quantity, but lesser profit when prices rise, as a result of low demand associated with high prices. The study concludes that commodity price changes have strong influence on determination of the financial performance of oil firms and recommends that management should have adequate storage facilities to be able to store up more products when price falls. This would enable them sell more quantities at a lower price when price rises