Geopolitical tensions, OPEC news, and the oil price: A granger causality analysis

Abstract

To what extent do geopolitical tensions, supply disturbances, and unexpected news in the Organisation of the Petroleum Exporting Countries (OPEC) and major oil-producer countries affect the oil price? Are oil price forecasters aware of these tensions? Do these tensions affect forecasters’ consensus when making their predictions? Is there a difference between news coming from OPEC countries versus other major oil exporters? In this article, we analyse the influence of geopolitical tensions, news, and events in major oil producers on the Brent oil price, its forecasts, and the dispersion of those forecasts. We empirically test these hypotheses by introducing and making use of a unique media-based measure of geopolitical tensions accounting for supply crunches and expansions for the 2001-12 period, by means of Granger causality. We found evidence suggesting that overall geopolitical tensions affect the current level of oil price, its forecasts, and the dispersion of those forecasts. More remarkably, when separating between OPEC and non-OPEC news, we found that the former affect oil price forecasts and its consensus, and at the same time, the current oil price determine oil-based news on OPEC countries. Moreover, non-OPEC news affect the current and future oil price level and neither the forecast nor the dispersion of those forecasts its affected by the level. All these results imply that geopolitical tensions in a broader sense affect oil prices, and OPEC news should be read jointly with other geopolitical tensions as oil price drivers –and not as an isolated news generator affecting oil prices. This weakens the hypothesis of OPEC as a price setter in the global oil market whose behaviour, in turn, seems a matter for forecasters. These results are important suggesting that, in order to keep track of oil price dynamics, one needs to account for a more general context of geopolitical tensions beyond OPEC countries, relying on signals and externalities that are not necessarily based on economic rationale.