Closer to One Great Pool? Evidence from Structural Breaks in Oil Price Differentials

Abstract

We show that the oil market has become closer to "one great pool," in the sense that price differentials between crude oils of different qualities have generally become smaller over time. We document, in particular, that many of these quality-related differentials experienced a major structural break in or around 2008, after which there was a marked reduction in their means and, in many cases, volatilities. Several factors explain these shifts, including a growing ability of the global refinery sector to process lower-quality crude oil and the U.S. shale boom, which has unexpectedly boosted the supply of high-quality crude oil. Differentials between crude oils of similar quality in general did not experience breaks in or around 2008, although we do find evidence of breaks at other times. We also show that these structural breaks can affect tests of stationarity for many price differentials.

Return and volatility transmission between China's and international crude oil futures markets: A first look

“…In line with Protopapadakis and Stoll (1983), there are cointegration relationships among these crude oil futures markets, despite substantial oil quality differences in their underlying asset. The new finding contributes to the debate over whether the international crude oil market has becoming closer to “one great pool,” which is always examined using cash market data but not futures market data (see, e.g., Galay, 2019; Plante & Strickler, 2019). Consistent with the perception of their relative informational role, both the INE and Oman futures react to deviations from their long‐run equilibrium with the WTI and Brent futures.…”