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 the price of oil? What is the mechanism through which China affects the price of oil? These questions reveal the need for a better understanding of oil market dynamics. Building on EIA (2018a); Ratti and Vespignani (2015), and Kaufmann et al. (2004), we account for the prolonged oil price drop of 2014 and examine OPEC and non-OPEC production, the world’s and China’s demand for oil, 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 1997M01 and 2018M04, the model reveals: (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, as well as dynamics in the oil market and global economy; and (e) China’s impact on oil prices is driven by China’s exports of refined products and domestic demand.