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Location Basis Differentials in Crude Oil Prices

Abstract:
We examine the long-run pricing relationship among crude oil prices at the North Sea (Brent) and Cushing (WTI) delivery points. The Brent-WTI location basis differential is stable until December 2009, but it widens to record levels in the next two years. We report on recent changes in the crude oil market that causes the prices to move apart. Brent and WTI prices are cointegrated prior to this structural break, but not between 2010 and 2015. Since the U.S. lifted the crude oil export ban in December 2015, Brent and WTI prices have reintegrated. U.S. retail gasoline prices respond to Brent and WTI before January 2010 and then only to Brent afterwards.

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Keywords: Brent, West Texas Intermediate, Basis differential

DOI: 10.5547/01956574.40.SI2.pluo

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Published in Volume 40, Special Issue of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.