Available online at www.ijapie.org International journal of advanced production and industrial engineering IJAPIE-2019-04-233, Vol 4 (2), 13-19 IJAPIE Connecting Science & Technology with Management. A Journal for all Products & Processes. Modelling Crude Oil Prices Volatility in India Khyati Kathuria 1 , Shikha Gupta 2 , Nand Kumar 3* ( 1,2,3 Delhi Technological University, Delhi 110042) Email:nandkumar@dce.ac.in https://doi.org/10.35121/ijapie201904233 | IJAPIE | ISSN: 2455–8419 | www.ijapie.org | Vol. 4 | Issue. 2 | 2019 | 13 | Abstract :Crude oil is a crucial component of India’s energy basket after coal. The increasing demand for crude oil in India is met through imports. Crude oil price changes affect the social stability, economic development, and national security of the country. Therefore, it is crucial to devise suitable methods to forecast crude oil price movements accurately.Thus, the purpose of this study is to evaluate the forecasting performance of linear and non-linear time series models. In the study Box Jenkins methodology is used to obtain a best fit ARIMA and GARCH type models and further use it to forecast the crude oil (Brent) prices. The study shows that the crude oil price series is volatile over the time trend and therefore uses the GARCH class models as well which are capable of capturing volatility clustering typical of oil price series. Performance of ARIMA & GARCH class modes is then compared to find out which model better forecasts the crude oil prices. Indian economy being vulnerable to volatility in the international crude oil market requires a methodology to accurately forecast the price volatility and therefore to fill this gap this study for forecasting and studying the behavior of crude oil price series was conducted. Keywords:Crude oil, Box Jenkins Methosd, ARIMA, GARCH.. 1. INTRODUCTION Crude oil is a crucial component of India’s energy basket after coal. The increasing demand of crude oil in Indian economy is fulfilled by more of imports. Due to this the Indian economy is vulnerable to volatility in the international markets as the domestic production has also remained low in the recent years (Soni, 2014). Crude oil being a basic source of energy and an important resource to socio economic development affects the development, stability and even security of India. Thus, it is crucial to devise ways and means so that crude oil price volatility can be forecasted as accurately as possible. This will help to cover market risks and discover profitable opportunities. Moreover, these forecasts can be employed to numerous decision-making processes like framing macroeconomic policies, managing risks of investments, managing the portfolio (Xu and Ounniche,2012). Disruptions in the oil market are mainly due to political and military upheavels. 1973 Arab-Israel war, 1978-89 Iranian revolution, 1980 Iran-Iraq war & 1990-91 Gulf war have been the 4 major crisis that contributed to the rise in volatility of crude oil prices since 1973. WTI crude crossed $80 per barrel in September 2007. One of the main factors that caused a rise in the crude oil price was –OPEC declared that output will increaseless than expectations, stocks of US fell much less than anticipations, the federal oil policy changes, leftist group attacked 6 pipelines in Mexico, oil prices shot up to $147.27 per barrel on July 11,2008 due to the Iranian missile tests. This price increase was mainly the consequence of a short period when global demand exceeded supply, other factors include a decline in the petroleum reserves, middle east tension, speculation in oil prices.After these events, oil prices started to fall. Decline in the demand for oil in US was one strong contributor to this price decline (Nian,2009).In India such volatility in crude oil prices depends upon oil intensity of energy consumption, domestic production, oil import dependence of the country and most importantly due to availability of oil in the international markets. India being dependent on foreign countries for crude oil is exposed to volatility & geopolitical uncertainties of the international markets. Importing more than 80% of the crude oil from OPEC countries a major proportion of Indian crude oil supplies have to pass through geopolitical bottlenecks. It is anticipated that this dependence on imports will rise to exceed 90% by 2031-32. This will adversely impact the forex reserves and the current account balance of the country. Crude oil prices volatility affects the other sectors as well. Therefore, it becomes much more vital to predict the future crude oil prices. A model that has become popular overtime in forecasting the time series is the Box Jenkins method. Therefore, in the present studyBox Jenkins methodology is employed for forecasting crude oil prices.