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.

The Time-Dependent Lead-Lag Relationship Between WTI and Brent Crude Oil Spot Markets

“…After the lift of export ban, WTI spot almost evolves simultaneously with Brent (see in Figure 1A). The WTI and Brent crude oil returns display a bi-directional lead-lag structure (see in Figure 1C) with 48.24% positive x(t) in the Sub 4 period, which is consistent with the fact that WTI and Brent have reconnected ever since the lift of the ban [16].…”

“…WTI was trading at a large discount to Brent. Though several pipeline projects from Cushing to the Gulf Coast were built to expand transportation capacity after 2012 [16,28], the U.S. crude oil could not be exported to the global marketplace to arbitrage away the spread due to the export ban [7] and transportation bottleneck [29]. Subsequently WTI was actually more a localized market than a globalized market.…”

“…Also, trade and efficiency in the oil market increased [31]. Consequently, sustainable increases in pipeline capacity together with the lift helped WTI reconnect with international crude oil prices [16]. After the lift of export ban, WTI spot almost evolves simultaneously with Brent (see in Figure 1A).…”

“…The turning point of the WTI-Brent spread structure [6][7][8][9] in 2011 accords with the upheaval of the x(t) . The shift of energy policy, i.e., the lift of the export ban in 2015, has reconnected WTI to Brent [16]. The alternate lead-lag relationship lasts until the end of the sample.…”

“…Similarly, Basistha and Kurov [15] examine the impact of monetary policy shocks on energy prices and find different response patterns. Luong et al [16] document that WTI and Brent have reintegrated since the lift of the U.S. crude oil export ban.…”