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Physical Markets, Paper Markets and the WTI-Brent Spread

Bahattin Buyuksahin, Thomas K. Lee, James T. Moser, and Michel A. Robe

Year: 2013
Volume: Volume 34
Number: Number 3
DOI: 10.5547/01956574.34.3.7
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We document that, starting in the Fall of 2008, the benchmark West Texas Intermediate (WTI) crude oil has periodically traded at unheard-of discounts to the corresponding Brent benchmark. We further document that this discount is not reflected in spreads between Brent and other benchmarks that are directly comparable to WTI. Drawing on extant models linking oil inventory conditions to the futures term structure, we test empirically several conjectures about how calendar and commodity spreads (nearby vs. first-deferred WTI; nearby Brent vs. WTI) should move over time and be related to storage conditions at Cushing. We then investigate whether, after controlling for macroeconomic and physical market fundamentals, spread behavior is partly predicted by the aggregate oil futures positions of commodity index traders.

International Oil Market Risk Anticipations and the Cushing Bottleneck: Option-implied Evidence

Marie-Hélène Gagnon and Gabriel J. Power

Year: 2020
Volume: Volume 41
Number: Number 6
DOI: 10.5547/01956574.41.6.mgag
View Abstract

This paper studies crude oil market integration and spillovers between Brent and WTI oil indexes over the 2006�2019 period. In addition to prices, we estimate time series of model-free option-implied moments to capture forward-looking market views and anticipations of different risk categories. We describe the WTI-Brent equilibrium relationship in prices and in risk expectations measured by implied volatility, skewness, and kurtosis. Using a fractional cointegration model, we find long memory in the price cointegrating vector and in implied moments, implying that persistence of shocks is an important feature of crude oil markets. The evidence supports a differential in implied volatility but not in prices, and suggests equilibrium fragmentation during the Cushing bottleneck period. Analysis of implied moments reveals that Brent and WTI risk anticipations generally share a common equilibrium. Unlike volatility, asymmetric and tail risks are more locally driven, especially during market disruptions such as the Cushing bottleneck, so there is potential for diversifying extreme risks using both indexes.

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