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Threshold Cointegration Analysis of Crude Oil Benchmarks

Shawkat M. Hammoudeh, Bradley T. Ewing and Mark A. Thompson

Year: 2008
Volume: Volume 29
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No4-4
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Abstract:
The paper examines the dynamic relationship between pairs of four oil benchmark prices (i.e., West Texas Intermediate, Brent, Dubai, and Maya), which have different physical properties and locations. The results indicate that there is a long-run equilibrium relationship between different benchmarks, regardless of their properties and locations. More importantly, there is asymmetry in the adjustment process that is specifically modeled and implications are discussed.



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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Abstract:
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.



Informed Trading in the WTI Oil Futures Market

Olivier Rousse and Benoit Sevi

Year: 2019
Volume: Volume 40
Number: Number 2
DOI: 10.5547/01956574.40.2.orou
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Abstract:
The weekly release of the U.S. inventory level by the DOE-EIA is known as the market mover in the U.S. oil futures market. We uncover suspicious trading patterns in the WTI futures markets in days when the inventory level is released that are higher than market forecasts: there are significantly more orders initiated by buyers in the two hours preceding the official release of the inventory level, with a drop in the average price of -0.25% ahead of the news release. This finding is consistent with informed trading. We also provide evidence of an asymmetric response of the oil price to oil-inventory news, and highlight an over-reaction that is partly compensated in the hours following the announcement.



Shock Propagation Across the Futures Term Structure: Evidence from Crude Oil Prices

Delphine H. Lautier, Franck Raynaud, and Michel A. Robe

Year: 2019
Volume: Volume 40
Number: Number 3
DOI: 10.5547/01956574.40.3.dlau
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Abstract:
To what extent are futures prices interconnected across the maturity curve? Where in the term structure do price shocks originate, and which maturities do they reach? We propose a new approach, based on information theory, to study these cross-maturity linkages and the extent to which connectedness is impacted by market events. We introduce the concepts of backward and forward information flows, and propose a novel type of directed graph, to investigate the propagation of price shocks across the WTI term structure. Using daily data, we show that the mutual information shared by contracts with different maturities increases substantially starting in 2004, falls back sharply in 2011-2014, and recovers thereafter. Our findings point to a puzzling re-segmentation by maturity of the WTI market in 2012-2014. We document that, on average, short-dated futures emit more information than do backdated contracts. Importantly, however, we also show that significant amounts of information flow backwards along the maturity curve - almost always from intermediate maturities, but at times even from far-dated contracts. These backward flows are especially strong and far-reaching amid the 2007-2008 oil price boom/bust.



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
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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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