OPEC news announcements: Effects on oil price expectation and volatility

a r t i c l e i n f o JEL classifications: C51 N70 Keywords: Crude oil price volatility GARCH Covariates Modified dummy variables OPEC announcements WTI crude oil Several times a year, OPEC hosts conferences among its members to agree on further oil production policies. Prior to OPEC conferences, there is usually rampant speculation about which decision concerning world oil production levels (no change, increase, or cut) will be announced. The purpose of our investigation is to assess the impact of OPEC announcements on expectation and volatility of daily oil price changes (returns). We modify dummy variables indicating the day of an OPEC announcement to reflect a certain pattern of impact on return expectation and volatility. A combination of regression and GARCH models can then differentiate between pre-and post-announcement effects, and distinguish between the three kinds of OPEC decisions. We find evidence for a post-announcement effect on expectation, which is negative in the case of a cut decision and positive in case of an increase or maintain decision, while there is a positive pre-announcement effect on volatility, which is strongest in the case of a cut decision. During the past two decades, historic lows and highs could be witnessed in the crude oil market. " The world seems to have entered an era of higher crude oil volatility " , Fattouh (2005) presumed in his study on the causes of oil price volatility. Economic factors, geopolitical tensions, and uncertainty over supply and demand have been brought forth to explain these extreme movements in oil prices. Speculation is blamed, notably by the OPEC, while at the same time analysts question the role of the cartel: " OPEC's policies will ensure oil price volatility " , instead of being a stabilizing force, an FT article commented on the cartel's first scheduled meeting after crude oil prices had hit the $100-a-barrel level for the first time. " Speculative flows accentuate price movements, but the producer group is their prime cause. " 1 To seek causes of volatility on the cartel's side appears " understandable " to Fattouh (2005) in view of the OPEC's central position in the oil market. The members' ability to effectively cartelize the oil market is the object of ongoing discussion; cf. the cartel established a system in which it regulates oil production among its members. Several times a year, the OPEC schedules a conference in order to …