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OPEC and the crude oil market structure

Student name: Ms Tanmeet Thukral
Guide: Dr Kaushik Ranjan Bandyopadhyay
Year of completion: 2015
Host Organisation: The Energy and Resource Institute (TERI), New Delhi
Supervisor (Host Organisation): Mr Anandajit Goswami
Abstract: This study investigates whether OPEC still continues to be a dominant player in world crude oil market. Over the last decade the world crude oil market has undergone a sea change with reduced spare crude oil capacity of OPEC, increasing demand from India and China, and influx of speculative elements due to intertwining of financial and physical commodity markets coupled with financial crisis and geopolitical disturbances. The growth of the natural gas market also appear to have a potential bearing on the crude oil market as natural gas is a close substitute of crude oil in terms of its end-uses. In view of this, the thesis made an attempt to econometrically model world crude oil prices by considering both the physical and speculative determinants and also considering geopolitical and financial crisis dummies. Some of the explanatory variables considered in the time series regression are- OPEC capacity utilization, refining capacity, demand from India and China, OECD stocks on land, natural gas prices and speculation. Quarterly data from 1987 Q2 to 2014 Q4 has been used for the estimation. Cointegration result confirms that these variables have a long run relationship with the crude oil prices. Results from VECM estimation additionally indicates a statistically significant relationship among the dependent variable and its explanatory variables that are included in the econometric model. The study also reinforces that OPEC acts as clumsy cartel with little or no coordination among its members. Keywords: Crude Oil, Crude oil market, OPEC, Econometric modeling, Time series analysis.