WTI and Brent futures pricing structure

WTI and Brent crude oil futures are competing pricing benchmarks and they jockey for the number one position as the leading futures market. The price spread between WTI and Brent is also an important benchmark itself as the spread affects international trade in oil, refiner margins, and the price of...

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Bibliographic Details
Published in:Energy economics 2018-05, Vol.72, p.462-469
Main Authors: Scheitrum, Daniel P., Carter, Colin A., Revoredo-Giha, Cesar
Format: Article
Language:English
Subjects:
Benchmarks
Brent
Cointegration analysis
Commodity storage
Competitive storage model
Computer simulation
Crude oil
Crude oil futures
Energy economics
Futures
Futures market
International trade
Markets
Petroleum
Prices
Pricing
Production
Simulation
Storage
Studies
Supply & demand
WTI
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Summary:WTI and Brent crude oil futures are competing pricing benchmarks and they jockey for the number one position as the leading futures market. The price spread between WTI and Brent is also an important benchmark itself as the spread affects international trade in oil, refiner margins, and the price of refined products globally. In addition, the shapes of the WTI and Brent futures curves reflect supply and demand fundamentals in the U.S. versus the world market, respectively. On the analysis of the relationship between the two futures prices, we identify a structural break in the WTI–Brent price spread in January 2011 and a break in the corresponding shapes of the futures curves around the same time. The structural break was a consequence of a dramatic rise in U.S. production due to fracking, a series of supply disruptions in Europe, binding storage constraints, and the U.S. crude oil export ban. These events are studied in the context of a simulation model of world oil prices. We reproduce the stylized facts of the oil market and conclude that the 2011 break in pricing structure was consistent with standard commodity storage theory. •Identify structural break in cointegration of WTI and Brent spot and futures prices•Establish stylized facts of the WTI and Brent oil markets before and after break•Develop two-region competitive storage model of WTI-Brent oil market•Simulate competitive storage model consistent with causes of structural break•Replicate break in cointegration consistent with commodity storage theory
ISSN:0140-9883
1873-6181
DOI:10.1016/j.eneco.2018.04.039