OPEC Production Research Articles

Optimal allocation of production quotas using an inverse DEA integrated with lean production capacity and negative data

In the past decade, the petroleum industry has faced two significant oil price crashes. The first occurred in 2014, driven by increased U.S. production, geopolitical shifts, and changes in OPEC policies. The more recent crash in 2020 was a consequence of the COVID-19 pandemic. Despite these secondary factors, industry experts widely attribute both crashes to excessive crude oil production. Considering this and aiming to prevent recurrences of unexpected price crashes in the future, this paper proposes a novel application of inverse DEA for optimizing OPEC production quotas. In this study, two versions of the inverse DEA are proposed − unbounded and bounded. Essentially, the unbounded model computes theoretical estimates of production quotas, while the bounded model computes practical estimates. To illustrate the applicability of the proposed models, a numerical real-world example is presented in OPEC member nations. Based on a preliminary analysis, only Algeria, Libya, Nigeria, and Venezuela were eligible for production allocations. The application of the unbounded model revealed all four nations were capable of maxing out their production quotas. For practical reasons, and in order to ensure market stability, the bounded model found out that only Libya could potentially receive a maximum allocation of 7.71%. This translates to an increase of 93 thousand barrels of oil per day for Libya. The bounded model not only averted excessive crude oil production but also curtailed hazardous waste associated with increased oil production, resulting in significant positive effects in both Libya and Venezuela. According to our findings, the unbounded model is appropriate for theoretical analysis, while the bounded model is suitable for regulatory bodies such as OPEC.

Can U.S. strategic petroleum reserves calm a tight market exacerbated by the Russia–Ukraine conflict?

Recent changes in global petroleum markets have driven the debate regarding the use of strategic petroleum reserves (SPRs) as a price management tool during periods marked by extreme price volatility. We examine the price management role of the U.S. SPR under typical market conditions and in extreme emergencies. Furthermore, we discuss the White House's hypotheses that (a) boosted Organization of the Petroleum Exporting Countries' (OPEC) production and releases from the U.S. SPR result in a negative pressure on U.S. gasoline inflation, and (b) crude oil releases from the U.S. SPR helps balance the global oil market. The threshold cointegration results indicate that U.S. SPR releases impact neither OPEC production nor imported input prices. We apply a hybrid open-economy Phillips curve to model gasoline inflation, accounting for backward- and forward-looking price settings, domestic and global slackness, and energy security. We distinguish between normal-, super-, and hyper-backwardation and -contango oil markets using threshold cointegration and regression techniques. Our results demonstrate that SPR releases and OPEC output increases generally decrease inflation, with a crucial exception being the hyper-backwardation market, as seen in 2021–2022. This period was characterized by severely constrained global supply buffers, including OPEC's spare capacity, exacerbated by the Russia–Ukraine conflict. For this period, we conclude that (1) the impact of OPEC production changes on gasoline inflation would be negligible, (2) excess domestic demand relative to domestic supply raises concerns about domestic energy security, and (3) the unprecedentedly large SPR drawdowns are likely to have caused the market to panic and contributed to gasoline price increases, contrary to arguments suggesting that the 2022 releases eased domestic gasoline prices. We conclude that the SPR is an ineffective price control mechanism during crises and may not have the strategic value previously thought in an extremely tight oil market.

Oil supply expectations and corporate social responsibility

This paper examines how changes in oil supply expectations affect the social responsibility scores of Chinese listed companies and attempts to identify the source of this expectations in terms of uncertainty and orderliness of OPEC production. We document strong evidence that supply news shocks have a statistically and economically significant impact on corporate social responsibility. Supply expectations strongly impact social responsibility performance in the energy sector, with negative news leading to higher oil prices and increased economic uncertainty. Based on real options theory and precautionary storage effects, firms increase oil inventories when OPEC announcements are disclosed. This leads to increased tension in firms' cash flows, which provides evidence of the expected supply channel operation.

Aktor Pendorong Kebijakan Pengurangan Produksi Minyak Opec Di Era Pandemi Covid-19 Tahun 2020

This research is based on true changes caused by the spread of COVID-19 in 2020, it influences all world’s industry sectors. This situation ruins all the export-import process. OPEC’s largest oil-exporting country decided to cut production policies to stabilize the situation. This research aims to find out the factors that affect OPEC's oil production cuts in 2020.In this study, the authors use explanatory research to explain the factors driving production cuts. From the results of the study, it was found that there were several causes of OPEC production cuts. They are the abundance of goods, conflicts between member countries, the competition from non-OPEC organizations, lockdown, activities restrictions enforcement, and industrial production activities restrictions. Internal and external factors strongly encourage OPEC's oil production cut policy.

Sensitivity of Crude Oil Price Change to Major Global Factors and to Russian–Ukraine War Crisis

To assess the elasticity of crude oil price to global factors related to supply of crude oil and the US dollar exchange rate, the authors employed nonlinear models including flexible least squares, and maximum likelihood estimator, in addition to OLS regression mode; using yearly data from 1965 to 2021. The findings indicate change in oil prices due to 1% change in any of the explanatory variables, as follows: the effect of the US dollar depreciation rate, raise crude oil price/barrel by 71 US cents; and increase in OPEC production, decrease crude oil price by 82 US cents; a decrease in non-OPEC production, raise oil price by 4.78 US$. These results imply that, if a ban imposed on Russian crude oil export, and no increase in OPEC production to compensate Russian oil loss in the international markets, global crude oil price expected to rise by 88 US$ above its level before Russian–Ukraine crisis, meaning that crude oil price expected to rise at 160 US$ pbab. However, if OPEC members increase their output level by 10 million barrels per day to compensate the Russian oil loss, then global crude oil price is expected to stay at 102 US$ pb.

Sensitivity of crude oil price change to major global factors and to Russian-Ukraine war crisis

To assess the elasticity of crude oil price to global factors related to supply of crude oil and the US dollar exchange rate, we employed nonlinear models including flexible least squares (FLS), and maximum likelihood estimator (MLE), in addition to OLS regression mode; using yearly data from 1965 to 2021. Our findings indicate change in oil prices due to 1% change in any of the explanatory variables, as follows: the effect of the US dollar depreciation rate, raise crude oil price/barrel by 71 US cents; and increase in OPEC production, decrease crude oil price by 82 US cents; a decrease in non-OPEC production, raise oil price by 4.78 US$. These results imply that, if a ban imposed on Russian crude oil export, and no increase in OPEC production to compensate Russian oil loss in the international markets, global crude oil price expected to rise by 88 US$ above its level before Russian–Ukraine crisis, meaning that crude oil price expected to rise at 160 US$ pb[1][2]. However, if OPEC members increase their output level by 10 million barrels per day to compensate the Russian oil loss, then global crude oil price expected to stay at 102 US$ pb.

An analysis of OPEC oil production reaction to non-OPEC oil supply

This paper examines the impact of non-OPEC oil supply on OPEC oil production level at different quantiles of the OPEC production empirical distribution. It employs the Quantile Autoregressive Distributed Lags (QARDL) model that allows to probe simultaneously short-term connections and long-run cointegrating relationships across a range of quantiles. The analysis is undertaken using monthly data from January 1993 to March 2020.The main findings show that the influence of non-OPEC production on OPEC production is symmetric in the long-run but quantile-dependent in the short-run. In the short-run OPEC production decreases significantly following an increase of non-OPEC production. However, in the long run, the increase in non-OPEC production causes OPEC production to rise. Furthermore, the results show that oil prices increase OPEC production in the long- and short-run. The potential policy implications for OPEC and non-OPEC oil production are discussed.

Strategic interactions and price dynamics in the global oil market

In a simplified theoretical framework, we model the strategic interactions between OPEC and non-OPEC producers and the implications for the global oil market. Depending on market conditions, OPEC may find it optimal to act either as a monopolist on the residual demand curve, to move supply in-tandem with non-OPEC, or to offset changes in non-OPEC supply. We evaluate the implications of the model through a Structural Vector Auto Regression (VAR) that separates non-OPEC and OPEC production and allows OPEC to respond to supply increases in non-OPEC countries. This is done by either increasing production (Market Share Targeting) or by reducing it (Price Targeting). We find that Price Targeting shocks absorb half of the fluctuations in oil prices, which have left unexplained by a simpler model (where strategic interactions are not taken into account). Price Targeting shocks, ignored by previous studies, explain around 10 percent of oil price fluctuations and are particularly relevant in the commodity price boom of the 2000s. We confirm that the fall in oil prices at the end of 2014 was triggered by an attempt of OPEC to re-gain market shares. We also find the OPEC elasticity of supply three times as high as that of non-OPEC producers.

Did OPEC change its behaviour after the November 2014 meeting?

We analyse the behaviour of OPEC as a group by formulating a theoretical model that encompasses the perfect competition model and various forms of the imperfect competition model. By confronting the theoretical model with quarterly data for the period from 1992 to 2013 within the context of a cointegrated vector autoregressive (CVAR) model, we find support for the imperfect competition hypothesis regarding the output decisions of OPEC. We also find that a dynamic equilibrium correction model with imperfect competition is stable in-sample. However, a forecasting exercise for the period from 2014 to 2018 reveals that the model breaks down following the November 2014 meeting at which OPEC decided to keep its supply unchanged despite the huge oil price drop in advance. The model systematically underpredicts OPEC production over the forecast period and by as much as 2.5 million barrels per day at the end of 2016. During 2018, however, the model forecasts OPEC production quite well. Our findings suggest that the behaviour of OPEC did indeed change significantly after the November 2014 meeting.

OPEC news and jumps in the oil market

We study the role of OPEC meeting dates and production announcements for predicting jumps in the oil market. The analysis covers the daily period from 2nd December 1997 to 26th May 2017, with the start and end dates corresponding to our availability of intraday oil-price data. We start our analysis by applying the standard linear Granger non-causality test to analyze whether the OPEC-based predictors cause jumps. This test fails to detect predictability from OPEC-based predictors to oil-market jumps. Yet, given the strong evidence of nonlinearity between jumps and OPEC production announcements and meeting dates, we then use a nonparametric causality-in-quantiles test. Upon employing this data-driven robust approach, we find strong evidence that the OPEC-based predictors do predict oil-market jumps, ranging from the lower end of the conditional distribution of jumps to around the median.

Effect of the 2016 OPEC production cut announcement on the default likelihood of the oil industry and commercial banks

Effect of the 2016 OPEC production cut announcement on the default likelihood of the oil industry and commercial banks

Effect of the 2016 OPEC production cut announcement on the default likelihood of the oil industry and commercial banks

Using option pricing methodology, we provide evidence the oil and banking industries' default likelihood decreased following OPEC's November 2016 oil production cut announcement. The effect is present within several oil sub-industries and for the banks conducting business in states with the most oil production. In addition, for the oil industry we find the decrease in default likelihood is more pronounced for firms with higher leverage, low financial slack, small market value, and small book-to-market ratios. For commercial banks, banks with higher non-performing assets and provision for loan losses experienced a greater decline in default likelihood. In addition, similar to the oil industry, size and book-to-market are significant determinants of the change in default likelihood.

Oil price jumps and the uncertainty of oil supplies in a geopolitical perspective: The role of OPEC’s spare capacity

The contribution of this paper is threefold: first, it introduces a new geopolitical risk index that incorporates recent geopolitical events ignored in Caldara and Iacoviello (2018)’s index. In addition to war threats and acts, terrorist threats and acts and nuclear threats, the new indicator accounts for global trade tensions, the changing fundamentals of U.S.-China relations, the escalated U.S.-Iran conflict, Saudi Arabia’s uncertainty, Venezuela’s crisis, and OPEC news that rise in response to important OPEC meetings and events connected with OPEC production levels. Second, it addresses how the volatility of six oil prices (the Nigerian Bonny Light, Brent, Dubai, OPEC, Tapis, and WTI) behave when the developed geopolitical risk index unexpectedly changes. Third, it examines whether OPEC maintains a buffer of spare capacity that it uses to respond to potential crises that reduce oil supplies. We show that an increase in the geopolitical risk index is significantly associated with unanticipated oil price changes, though with varying sensitivities. Our findings also reveal that OPEC’s use of spare capacity reduces the reaction of oil price to geopolitical risks but moderately, thus suggesting a limited stabilizing influence on the oil market. The limited amount of spare production capacity leaves the oil market on a knife’s edge as it deals with a host of potential supply disruptions stemming from geopolitical issues.

Strategic Interactions and Price Dynamics in the Global Oil Market

In a simplified theoretical framework we model the strategic interactions between OPEC and non-OPEC producers and the implications for the global oil market. Depending on market conditions, OPEC may find it optimal to act either as a monopolist on the residual demand curve, to move supply in-tandem with non-OPEC, or to offset changes in non-OPEC supply. We evaluate the implications of the model through a Structural Vector Auto Regression (VAR) that separates non-OPEC and OPEC production and allows OPEC to respond to supply increases in non-OPEC countries. This is done by either increasing production (Market Share Targeting) or by reducing it (Price Targeting). We find that Price Targeting shocks absorb half of the fluctuations in oil prices, which have left unexplained by a simpler model (where strategic interactions are not taken into account). Price Targeting shocks, ignored by previous studies, explain around 10 percent of oil price fluctuations and are particularly relevant in the commodity price boom of the 2000s. We confirm that the fall in oil prices at the end of 2014 was triggered by an attempt of OPEC to re-gain market shares. We also find the OPEC elasticity of supply three times as high as that of non-OPEC producers.

An analysis of the OPEC and non-OPEC position in the World Oil Market: A fractionally integrated approach

This paper deals with the analysis of the world, OPEC and non-OPEC oil production by testing the degree of persistence of the series throughout fractional integration. The analysis is relevant in the sense that it allows us to determine if shocks in the series have permanent or transitory effects. The results indicate evidence of mean reversion in the three series, especially for the world and OPEC production. We also notice evidence of multiple breaks though the degree of persistence seems to be relatively stable across the subsamples, with most of the values in the range [0.5, 1) implying non-stationary and mean reverting behavior.

OPEC production decisions, macroeconomic news, and volatility in the Canadian currency and oil markets

We examine the simultaneous effect of OPEC production decisions and press releases, oil and gasoline inventory surprises, as well as US and Canadian macroeconomic news announcements on oil and Canadian dollar volatilities around US and European financial crises. We use a multivariate volatility model and implement an impulse response analysis to decompose the exogenous impacts into direct and indirect effects induced by volatility spillover. We find evidence of context-specific impacts and show that 67% of the total accumulated effect of OPEC decision to maintain production on oil volatility is induced by volatility spillover from the Canadian foreign exchange rate.

Time-varied causality between US partisan conflict shock and crude oil return

To investigate the causality between US partisan conflict shock and crude oil return, this paper utilizes bootstrap full-sample Granger causality and bootstrap rolling window sub-sample Granger causality tests. Although no evidence supports the causal nexus between partisan conflict shock and crude oil return with full sample data, time-varied causality is observed for particular sub-samples. Such difference can be attributed to the parameter non-constancy in the VAR system. In terms of the empirical results, the US partisan conflict shock causes the fluctuations of the crude oil market in 2008–2009 and 2014–2015. However, such influence is temporary. Inversely, the crude oil return causes US partisan shock in 1985–1986, 1991–1994, 1998–2000 and 2012–2013. These findings indicate crude oil market significantly affects political stability of the US, especially during the periods of the Gulf War and OPEC production cut. The empirical results are robust in terms of both sample setting variation and window size selection.

Uncertainty, budget deficit and economic growth in OPEC member countries

ABSTRACT In this research, the effect of uncertainty and the government budget deficit on economic growth has been investigated in 12 OPEC member countries from 1997 to 2013. Given the structure of OPEC member countries, production uncertainty and oil revenue uncertainty were introduced as the proxy for the uncertainty variable, and the PP-GARCH method was used to estimate the two mentioned uncertainties. To investigate the relationship between research variables, the panel ARDL model was used based on two methods of PMG and MG for without and with uncertainty situations. The results of the research showed that under without uncertainty conditions, the government deficit and tax revenue had a significant negative effect on the economic growth of OPEC member countries. Also, in the uncertainty scenarios, both variables of production uncertainty and oil revenue uncertainty had a significant negative effect on the economic growth of countries in both short and long run.

The Oil Market Reactions to OPEC’s Announcements

Because of the crucial implications of the market power of OPEC, the aim of this paper was to investigate the oil asymmetric market reactions, such as the price and risk reactions, to OPEC’s announcements. Specifically, this paper first explored the oil price reactions to OPEC’s announcements and their heterogeneity to depict the directional role of OPEC based on event study methodology. Furthermore, this paper analyzed the oil risk reactions in the framework of a linear model. Our findings reveal several key results. The oil price reactions to OPEC production decisions behave quite heterogeneously in three kinds of decisions. Specifically, the reaction to announcements of a production increase shows an invert “U” shape, whereas there is a linear effect of cut announcements. Otherwise, when a maintain decision is announced, the oil prices have no obvious change over the sample period. Additionally, the oil risk reactions to OPEC’s announcements are heavily related to the interaction item between OPEC decisions and its production over full sample periods. Furthermore, OPEC’s role in promoting stability in crude oil markets by changing its production shows a heterogeneous condition after global financial crisis.

Comments: Market Remains Out of Balance

Editor's column Five years since the start of the precipitous oil price drop that led to the industry’s worst recession since the 1980s, the oil market is still struggling with supply/demand balances and price stability. Recent oil market forecasts reach essentially the same conclusion: the market will remain oversupplied into 2020, weighing on prices for the short term. In early July, OPEC and other major producers decided to extend production cuts into 2020 in an attempt to keep oil prices steady as global demand growth appeared to be slowing and US unconventionals output continued to rise. Global oil demand is predicted to increase by more than 1 million B/D this year, but that is lower than OPEC and the International Energy Agency (IEA) had forecast at the beginning of this year. OPEC, Russia, and other producers agreed to cut overall output by 1.2 million B/D in January and met in July to reassess the market. Even with the supply cuts, oil prices have dropped since hitting a high of $75/bbl for Brent in April. Slower world economic growth and the US-China trade dispute have undercut prices along with the rise in US production. The 11 OPEC members that are participating in the deal actually exceeded their required cuts, reaching 143% of compliance in May, according to the Reuters news agency. The producers’ group formed after oil prices began to fall sharply in the summer of 2014, from over $100/bbl to eventually under $30/bbl because of a supply glut caused primarily from a huge increase in US unconventionals output. In the first half of this year, world supply exceeded demand by 900,000 B/D, according to the IEA, which means OPEC may need to lower its cumulative production to its lowest level in 17 years next year to keep markets balanced. “Clearly, market tightness is not an issue for the time being and any rebalancing seems to have moved further into the future,” the IEA said in its monthly report issued in July. Global oil demand growth in the first quarter of this year was the slowest since 2011 and rose less than expected in the second quarter, according to the IEA. In addition, non-OPEC production, led by US shale, continued to expand. The task by producers trying to keep the market in balance will be even tougher next year. The IEA lowered its forecast for 2020 and increased its projections for non-OPEC output. That means the oil needed from OPEC will again decline, to well below its current output rate. About 29.1 million B/D will be required from OPEC next year, compared with output of 29.9•million B/D currently. OPEC production is already running below normal given the voluntary cutbacks and the crisis in Venezuela. “The picture will evolve as 2019 progresses but in the near term the main focus remains (world) demand growth,” the IEA said. The US Energy Information Administration lowered its oil demand growth forecast to 1.1 million B/D in its latest Short-Term Energy Outlook, issued in July. A year ago, it predicted global growth of 1.4 million B/D. It now predicts that US oil production will average 12.4 million B/D this year and 13.3 million B/D next year.