OPEC news and predictability of energy futures returns and volatility: evidence from a conditional quantile regression.

AutorDerbali, Abdelkader
  1. Introduction

    In recent years, oil prices have fluctuated dramatically. As far back as some of us can remember, the price of gasoline has tended to increase at a steady rate. The price gradually stabilized at around $100 per barrel until the economic crisis of 2008. However, the recovery was quick, culminating in the price never seen before.

    Here we are in 2015, threatened again by a major financial crisis. Meanwhile, oil prices have devalued to the lowest level since 2008. Organization of the Petroleum Exporting Countries (OPEC) continues to try to stabilize prices. Canada, known for the reliability and stability of its economy, has come under national pressure due to this uncertain economic situation. The Bank of Canada has even said that "the decline in Canada's terms of trade will also help to reduce the country's wealth." Besides, according to a Statistics Canada report, the country's GDP (gross domestic product) is declining for the first time since 2011.

    The lower value of oil prices affects customer incomes and, in turn, insurance premiums. As production and revenues decline, the risks associated with the oil industry change, leading to the recognition that it is now time to adjust premiums, to slow down capital projects (estimated at $7bn) and reduce social spending. CIBC (Canadian Imperial Bank of Commerce) world markets recently predicted that the unemployment rate in Alberta will rise from 2.5 to 6.5% this year alone - an expected loss of about 60,000 jobs. The layoffs in Alberta's energy industry (EI) are an example of the impact of this phenomenon on the country's economy. With layoffs, unemployed workers are making more use of EI while cutting spending, while the capacity of the insurance markets is at its highest level.

    In the past, OPEC was used to reacting to price fluctuations by adjusting oil production. This proved useful until Saudi Arabia decided to increase its production level, which notably fell in 2014. With oversupply from Canada and the USA (producers not part of the cartel), Saudi Arabia's export market shares have declined. Contrary to their tactics of the past, a temporary solution for OPEC could be to encourage self-sufficiency on the part of member countries. This market strategy would aim to refocus their regulatory efforts on themselves rather than on pricing.

    Recently, energy futures have emerged as an extremely popular asset class for investors and fund managers (Andreasson et al, 2016). The quickness in the financialization of commodity markets has also considerably augmented the numeral of market participants. In addition to being employed for hedging and speculative purposes, energy futures can also expand away from the risk of diversified stock/bond portfolios, mainly throughout financial and economic crises and bearish equity markets. Consequently, knowledge of the factors that define energy futures markets is probable to compose precious information for investors and managers.

    Amongst the different commodities, crude oil is maybe the majority significant given its important responsibility in the world economy relative to other energy commodities, mainly in conditions of causing crisis (Hamilton, 1983, 2008, 2009, 2013). Moreover, crude oil is crucial for transportation, industrial and agricultural sectors, whether used as feedstock in production or as a surface fuel in consumption (Mensi etal, 2014b).

    Besides, crude oil market volatilities are extensively recognized to spillover to other commodity markets (Kang and Yoon, 2013; Kang et al, 2016,2017; Mensi et al, 2013; Mensi et al, 2014b; Mensi et al, 2015; Chebbi and Derbali, 2015; Chebbi and Derbali, 2016a; Chebbi and Derbali, 2016b) and financial markets (Balcilar and Ozdemir, 2013; Balcilar et al., 2016, 2017; Balli et al., 2017; Gupta and Wohar, 2017; Bekiros and Uddin, 2017; Bekiros et al., 2017; Berger and Uddin, 2016; Kang et al., 2016; Lahmiri et al., 2017; Mensi et al., 2015; Narayan and Gupta, 2015).

    Currently, there have been only a few studies on the impact of a surprise component in the inventory announcement on price movement and volatility. Chang et al. (2009) used analysts' forecasts from Bloomberg to explore the reactions of intraday crude oil futures returns to unexpected inventory changes. They find an immediate response to crude oil returns to inventory news. Moreover, they argued that the reaction is larger when the survey was made by analysts with forecast accuracy in the past.

    Gay et al. (2009) find that the unexpected changes in Energy Information Administration (EIA) natural gas inventory reports have a significant impact on intraday futures returns immediately after a given announcement. By using a generalized autoregressive conditional heteroskedasticity (GARCH) model, Hui (2014) attempts to assess the impact of the unexpected inventory changes in the EIA report on daily crude oil returns and volatility. He finds that inventory shocks harm returns but suggests that there is no evidence of an effect on return volatility.

    Chiou-Wei et al. (2014) examine the dynamics of US natural gas futures and spot prices around the weekly announcements by the EIA report. Results highlight an inverse relation between the unexpected inventory changes and changes in futures prices. Also, the authors find no evidence of the effect of inventory shocks other than on the date when the EIA report is released.

    Halova et al. (2014) look at intraday data to investigate the impact of the unexpected part in EIA's crude oil inventory reports on both return and volatility. They find that energy returns respond more strongly to unexpected changes in inventory levels during the injection season than during the withdrawal season.

    Recently, Ye and Karali (2016) use intraday data to study the response of crude oil returns and volatility to inventory releases by the American Petroleum Institute (API) and EIA over the short August 2012-December 2013 time period. The document that inventory shocks in both API and EIA reports exerting an immediate inverse impact on returns and a positive impact on volatility.

    Miao et al. (2018) investigate the effect of the unexpected part of weekly crude oil inventory in EIA reports on oil futures and options prices. They show that prices strongly react to the inventory surprise on announcement day. Moreover, they find that futures return significantly decrease with positive surprises and increase with negative surprises.

    Additionally, as Shrestha (2014) comments, one can anticipate price detection to occur mainly in the energy futures markets because futures prices react to new announcements quicker than spot prices have known lower transaction expenses and better ease of small selling related to energy futures contracts. Furthermore, it is supposed that the futures market volatilities predict spot market volatilities for crude oil (Baumeister and Kilian, 2014, 2015; Baumeister et al., 2014, 2017). Therefore, determining the factors that drive the crude oil markets and, especially, the crude oil futures market, is of dominant significance for together investors and policymakers, which is our objective for this study through investigation of the significance of news from OPEC announcements and meeting dates.

    Some previous works analyze the effect of information on OPEC production decisions on the crude oil market (Kaufmann and Ullman, 2009; Loutia et al., 2016; Mensi et al., 2014a; Schmidbauer and Rosch, 2012; Wirl and Kujundzic, 2004). These works suppose that this nexus is linear and test the significance of the effect. Therefore, it should be noted that one could have also used nonlinear causality tests (Diks and Panchenko, 2005, 2006; Hiemstra and Jones, 1994) to examine the influence of OPEC news and meeting date information on energy futures returns and volatility.

    However, these tests rely on conditional mean-based estimation and, hence, fail to capture the entire conditional distribution of returns and volatility - something that our investigation can complete. In the process, our test is a supplementary general process to notice causality in both returns and volatility at each quantile of their conditional distributions. Consequently, we are capable to capture the presence or non-presence of causality in various energy futures, in the crude oil West...

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