Fundamentals and Oil Price Behaviour: New Evidence from Co-integration Tests with Structural Breaks and Granger Causality Tests

As the world economy has undergone various changes and shocks, the oil market went through significant fluctuations during the period 1994-2015. This study focuses on discussing the possible factors that determine crude oil prices, which include world economic growth, market power of Organization of the Petroleum Exporting Countries (OPEC), non-OPEC supply and the value of dollar, taking into account the structural changes that influence the study period, which is quarterly data for the period of 1994.Q1-2015.Q3. For time series stationarity tests, Zivot and Andrews (1992) and Perron (1997) unit root test with structural break is used. To test the existence of a long relationship in the presence of structural changes, the Gregory and Hansen (1996a, 1996b) method of co-integration is used. For long-run coefficient, we proceed to estimate fully modified least squares. The result shows a significant influence of non-OPEC supply, the dollar appreciation and world gross domestic product growth, but OPEC did not have a significant effect on the price of oil, which is indicated by the structural break for OPEC capacity utilisation at 2002.Q1, that indicates the starting point of the loss of OPEC power. Establishing the presence of co-integration, we apply the evaluation of Granger causality for co-integrated data, using vector error-correction model.