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- Title
The physical market and the WTI/Brent price spread.
- Authors
Liu, Pan; Stevens, Reid B.; Vedenov, Dmitry
- Abstract
Abstract: West Texas Intermediate (WTI) and Brent Crude are primary benchmarks in oil pricing. Although produced in different locations, WTI and Brent are of similar quality and are used for similar purposes. Under the oil market globalisation assumption (Weiner, 1991), prices of crude oils with the same quality should move closely together at all times. However, empirical evidence shows that notable variations exist in the WTI/Brent spread, particularly after 2010, creating risks as well as potential arbitrage opportunities for oil market participants. The paper analyses the dynamics of WTI/Brent price spread for the period between January 1994 and December 2016. A test for structural breaks in the WTI/Brent price spread indicates a change from a stationary to a non‐stationary time series in December 2010, which is also confirmed by the unit root and cointegration tests. The impact of physical market fundamentals on the dynamics of WTI/Brent price spread is then analysed using the Structural Vector Autoregression Model for each sub‐sample period separated by the structural break. Impulse response functions show that the WTI/Brent spread is mainly driven by US production shocks.
- Subjects
WEST Texas Intermediate Inc.; SPREAD (Finance); PETROLEUM sales &; prices; GLOBALIZATION; PETROLEUM industry
- Publication
OPEC Energy Review, 2018, Vol 42, Issue 1, p55
- ISSN
1753-0229
- Publication type
Article
- DOI
10.1111/opec.12117