Copyright Page
© 2022 International Monetary Fund
WP/22/183
IMF Working Paper
Research Department
OPEC and the Oil Market1
Prepared by Yousef F. Nazer and Andrea Pescatori
Authorized for distribution by Antonio Spilimbergo
September 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: This paper studies the historical importance of OPEC for oil price fluctuations. An event-study approach is used to identify the effects of OPEC announcements on oil price fluctuations. Results show that price volatility is higher than typical wound OPEC meetings. Also, members’ compliance, a proxy for credibility, has strongly fluctuated over time. An ordered multinomial logit framework identifies the main factors that explain OPECs decisions to cut, maintain, or boost members’ oil production and is able to successfully predict OPEC meeting outcomes 66 percent of the time, between 1989 and 2019. Cyclical oil price fluctuations (as opposed to persistent shifts in levels) drive OPECs decisions, suggesting that OPECs objective is to stabilize the oil price rather than countering fundamental shifts in demand and supply. Low OPEC s market share reduces the probability of a production cut. Finally, the transparency of OPECs statements has modestly improved between 2002 and2019.
| JEL Classification Numbers: | 013, Q41 |
| Keywords: | OPEC Meetings, Credibility, Oil sPrice, Text Analysis, OPEC+ |
| Author’s E-Mail Address: | Ynazer@imf.org; Apescatori@imf.org |
| JEL Classification Numbers: | 013, Q41 |
| Keywords: | OPEC Meetings, Credibility, Oil sPrice, Text Analysis, OPEC+ |
| Author’s E-Mail Address: | Ynazer@imf.org; Apescatori@imf.org |
Table of Contents
I. INTRODUCTION
II. THE IMPACT OF OPEC MEETINGS ON THE OIL MARKET
III. COMPLIANCE AND CREDIBILITY
IV. DRIVERS OF OPEC DECISIONS.
A. Baseline Results
B. Robustness
V. OPEC’S COMMUNICATION
VI.OPEC+
VII. CONCLUSIONS
REFERENCES
Figures
Figure 1: OPEC Announcement Decisions
Figure 2: OPEC Announcements : Effects on Oil Market
Figure 3: OPEC Meetings Price Anomalies
Figure 4: Oil Returns Around OPEC Meetings
Figure 5: Selected OPEC Meetings Effects on Oil Market
Figure 6: OPEC+ Countries Oil Dependency
Figure 7: OPEC Historical Compliance
Figure 8: Multinomial Logit Framework Results
Figure 9: Hodrick –Prescott Real Oil Price Decomposition
Figure 10: OPEC Statements Word Counts Dictionary
Figure 11: OPEC+ Price War 2020
Figure 12: OPEC vs. OPEC+ Market Share
Tables
Table 1: OPEC Average Production and Compliance by Decades
Table 2: OPEC Decision Prediction Results
Table 3: Baseline Specification Model Results
Table 4: Performance and Descriptive Statistics
Table 5: Different Specification Model Results
Table 6: Similarity Analysis for OPEC Concluding Statements
Table 7: OPEC Meeting Announcements
Table 8: OPEC Events Analysis (1989–2019)
Table 9: Expected vs. Unexpected Impact of OPEC Decisions
Appendices and Supplementary Material
Data Appendk
Oil Price Data
Macroeconomic Data and Composite Variables
Text Analysis: Approach
We are grateful to Antonio Spilimbergo, Tim Callen, Martin Stuermer, Lukas Boer, Bahar Alberto, Abdullah Al-Hassan, Omer E. Bayar, Moheb Malak, Issouf Samake for comments and Zhao Li for excellent econometric and programming assistance,