Oil price movements and production agreements

The purpose of this technical exercise is to apply econometric modelling to study the relationship between movements in the oil price and compliance by the Organization of the Petroleum Exporting Countries (OPEC) with its self‐assigned production agreements, whose purpose is to bring order and stability to the international oil market. After introducing various methods of measurement of compliance, the study applies these methods to monthly data for 1995–2002 for OPEC. It then identifies the method “over‐production as a percentage of ceiling” as the best‐fitting and most accurate criterion for measuring OPEC compliance. The paper then elaborates on intervention analysis, explains the various types of intervention in detail and introduces a number of econometric models to monitor oil price movements resulting from OPEC's intervention in the oil market, along with the extent of its compliance with its agreements. On applying the models to a set of historical monthly data, the study finds that higher oil prices have been achieved when the effective level of compliance lies in the range of 94–99 per cent, and that lower oil prices have been experienced when there is less compliance and more volatility. The paper notes that the achievement of order and stability is the responsibility of all parties in an international market that is inherently volatile.