OPEC and Non-OPEC Production, Global Demand, and the Financialization of Oil

Abstract

Does OPEC still matter? How do OPEC and non-OPEC oil production, global oil demand, and the role of oil as a financial asset influence oil prices? What is the mechanism through which China affects oil prices? These questions reveal the need for a better understanding of oil market dynamics. Our analysis builds on EIA (2018), Ratti and Vespignani (2015), and Kaufman et al. (2004). We extend these analyses by considering the 2014 prolonged oil price drop and accounting for OPEC and non-OPEC production, global demand for oil as well as China’s demand, and the role of oil as a financial asset by employing a vector autoregressive (VAR) model which accounts for cyclical movements. Using monthly data between 1997:01 and 2018:04, the model reveals that: (a) OPEC significantly balances oil markets, implying that OPEC still matters; (b) the role of oil as a financial asset is integral in explaining oil price movements; (c) U.S. oil production affects oil prices, but the influence of other non-OPEC production should not be underestimated; (d) China’s demand for crude oil affects oil prices, but focusing on China rather than global demand overlooks other important market segments, dynamics in the oil market and global economy, and the retaliation risk associated with international trade tensions; and (e) China’s impact on oil prices is driven by domestic demand and the increase in China’s exports of refined products.