OPEC announcements reveal hidden oil market shocks, new identification method proposed

OPEC announcements, while revealing unanticipated information about future oil supply, also lead imperfectly informed markets to revise their beliefs about demand conditions.

Consequently, surprises in oil futures prices around these announcements capture both a supply and a demand shock, conflating their distinct effects.

This paper proposes an empirical method to disentangle these components.

It exploits the high-frequency co-movement of oil futures prices and stock prices in a narrow window around OPEC announcements.

A demand shock moves both oil futures and stock prices in the same direction, whereas an oil supply news shock moves them in opposite directions.

Imposing a restriction on the sign of this co-movement yields clean instruments, allowing for a separate identification of these two components.

This reveals that negative oil supply news shocks have deep and long-lasting stagflationary effects, stronger than previously reported, posing a significant challenge for monetary authorities.

Quantifying oil price effects on the global economy is challenging as prices are endogenous to economic activity and respond to both supply and demand.

Oil supply news shocks are crucial, affecting prices through changes in market expectations about future production.

Negative supply shocks typically depress economic activity and increase prices, challenging monetary authorities.

OPEC announcements aid identification by generating unexpected variation in future oil supply.

However, the paper argues that markets often lack perfect information.

OPEC holds an informational advantage over the market regarding current and future oil production.

Forecasting OPEC decisions is difficult due to closed-door negotiations and members' varying adherence to quotas, introducing noise into price signals and complicating accurate demand assessment.