2022 SEPOPEC and the Oil Market Yousef F. Nazer and Andrea Pescatori WP/22/183 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. 2 © 202 2 In ternatio na l Mon eta ry Fund WP/22/183IMF 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 I MF m anagement. ABSTRACT: This paper studies the historical importance of OPEC fo r oil price fluctuations. An event-stu dy approach is used to id entify the effects of OPEC announcements on oil price fluctuations. Results show that price volatility is higher than typical around OPEC meetings. Also, members' compliance, a proxy for credibility, has strongly fluctuated over time. An ordered multinomial logit framework id entifies the main factors that explain OPEC's 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 flu ctuations (as opposed to persistent shifts in levels) drive OPEC’s decisions, suggesting that OPEC's objective is to stabilize th e oil price rather th an countering fu ndamental shifts in demand and supply. Low OPEC’s market share reduces the probability of a production cut. Finally, the transparency of OPEC's statements has modestly improved between 2002 and 2019. JEL Cla ssif ica tio n Nu mbers: O13, Q41Keywords: OPEC M eet in gs, Cred ib ilit y , Oil Price, Tex t An a ly sis, OPEC+ Author’s E-M ail Ad d ress: Yna zer@imf.org; Apescatori@imf.org 1 We are grateful to Antonio Spilimbergo, Tim C allen, Martin S tuermer, Lukas B oer, B ahar Alberto, Abdullah Al-Hassan, Ömer E. B ayar, Moheb Malak, Issouf Samake for comments and Zhao Li for excellent econometric and programming assistance, 3 Table of Contents I. INTRODUCTION....................................................................................................................................................4 II. THE IMPACT OF OPEC MEETINGS ON THE OIL MARKET ................................................................6 III. COMPLIANCE AND CREDIBILITY........................................................................................................... 13 IV. DRIVERS OF OPEC DECISIONS................................................................................................................. 16 A. Baseline Results ............................................................................................................................................ 17 B . Rob u s t ne s s ..................................................................................................................................................... 19 V. OPEC’S COMMUNICATION.......................................................................................................................... 20 VI. OPEC+ ................................................................................................................................................................. 22 VII. CONCLUSIONS............................................................................................................................................... 23 REFERENCES.......................................................................................................................................................... 24 Figures FIGURE 1: OPEC ANNOUNCEMENT DECIS IONS ............................................................................................................6 FIGURE 2: OPEC ANNOUNCEMENTS: EFF EC TS ON OIL MARKET ................................................................................9 FIGURE 3: OPEC MEETINGS PRICE ANOMALIES ....................................................................................................... 10 FIGURE 4: OIL RETURNS AROUND OPEC MEETINGS.................................................................................................. 11 FIGURE 5: SELECTED OPEC MEETINGS EFFECTS ON OIL MARKET............................................................................ 12 FIGURE 6: OPEC + COUNTRIES OIL DEPENDENCY ...................................................................................................... 13 FIGURE 7: OPEC HISTORICAL COMPLIANCE .................................................................