Modeling the global market for crude oil and forecasting the price: a comprehensive study

Crude oil prices before 1970 were under control by multinational monopolist oil companies; from 1970 to 1986 OPEC administered pricing system determined crude oil prices; and from 1986 to the present, crude oil prices are determined by a market-linked pricing mechanism or demand-to-supply ratio, taking in account a set of many other factors, such as economic, political, financial, technological, meteorological and oil reserves. As in a market-linked pricing mechanism, the main determinant factors behind crude oil prices are demand and supply; hence, identifying crude oil consumption and production and the drivers behind them are the main priority to define future crude oil prices. Therefore, to achieve an accurate crude oil price forecasting, a three stages study is required: 1) the first stage is to explore crude oil consumption in a worldwide scale. This means that the factors that explain crude oil consumption changes and consequently they are involved in crude oil price changes should be firstly recognized. 2) The second stage is to investigate crude oil production behaviors in a worldwide scale. This means that the factors that cause changes in crude oil production and consequently are involved in crude oil price changes should be identified. And 3) the third stage is to study the determinant factors behind crude oil price variations based on the results from stages one and two, and finally to choose the best models those with less forecasting errors. To perform the above-described stages, we develop three major researches: In the first study, we investigate crude oil consumption-economic growth nexus, applying the panel unit root, the panel cointegration and the panel Granger causality tests, under five panel framework studies, including a panel of OECD countries, panels of Latin American regions, panels of Sub-Saharan African countries, a panel of MENA countries and a panel of Southern and Eastern Asian emerging markets; moreover, we investigate the same effect in the case of an individual country-Portugal-as well. The results show that, among OECD, net oil importing Sub-Saharan African, MENA, Southern and Eastern Asian countries and Portugal, both in the short-run and in the long-run, there are bidirectional causality relationships between crude oil consumption and economic growth; in Central America region, in the short-run, there is a bidirectional causality relationship between the series, and in the long-run, there is a unidirectional causality relationship running from crude oil consumption to economic growth; and among net oil exporting Sub-Saharan African countries, in the short-run, there is a unidirectional causality relationship running from crude oil consumption to economic growth, and in the long-run, there is a bidirectional causality relationship among the series; and in Caribbean and South America regions, in the short-run, there are bidirectional causality relationships between the series, while in the long-run, there is a unidirectional causality relationship running from economic growth to crude oil consumption. According to the above-described results, we recommend that economic growth can be used as an explanatory variable to explain future changes in crude oil consumption and consequently future international crude oil prices. Moreover, among the regions that crude oil consumption Granger causes economic growth, we recommend that policymakers implement oil conservation policies more carefully and consider that reduction of crude oil consumption has negative impacts on their economic growth. In the second study, we investigate crude oil production behaviors by OPEC members and non-OPEC producers, using the unit root test, the ARDL bounds testing approach for cointegration and the Granger causality test. The importance behind identifying the determinant factors of crude oil production in a worldwide scale is that, in a market-linked pricing mechanism, crude oil production is an explanatory factor of crude oil prices; therefore, determining the variables that impact on crude oil production is essential in order to analyze future crude oil market and to increase the forecasting accuracy of future crude oil prices. The results of the second study show that, each crude oil producer country has a different production behavior based on its domestic conditions, and there is not a unique set of explanatory variables that can be suggested as the determinant factors; this applies to OPEC and non-OPEC producers. We recommend the adoption of punitive and incentive tools by OPEC as an international organization to oblige its member to follow the appropriate production behavior in order to stabilize crude oil prices. Moreover, OPEC members’ quota as an official criterion is the only helpful variable to control and explain future fluctuations of international crude oil prices. And in the third study, we perform crude oil price modeling and forecasting. We analyze the determinant factors that impact on crude oil price by developing nine structural models to explain the drivers behind crude oil price movements. We provide the short term monthly forecasts for the nominal spot price of Brent crude oil for the years 2008 and 2012. The results show that, the 2008 price shock mainly can be explained by the surge in the OECD industrial production, and that the 2012 price movement mainly can be clarified better by the level of speculation in crude oil markets. Thus, we recommend the adoption of some restrictions on the financialization of crude oil markets