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Price discount, inventories and the distortion of WTI benchmark

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  • Kao, Chung-Wei
  • Wan, Jer-Yuh

Abstract

Applying a rolling estimation to the Hasbrouck information share model, this study investigates the changing status of WTI benchmark over time. Results show the ability of WTI in reflecting market conditions decreases sharply, and WTI's efficiency in processing information has been surpassed by Brent's since the second half of 2004. In the short run, the WTI distortion is related to its price discount problem, but the distortion cannot be indicated by contangos. In the long run, WTI's price discount problem coexists with a positive forward curve and both have harmed the price discovery role of WTI. The rising inventories in Cushing significantly deteriorate WTI's ability in serving as a world benchmark.

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  • Kao, Chung-Wei & Wan, Jer-Yuh, 2012. "Price discount, inventories and the distortion of WTI benchmark," Energy Economics, Elsevier, vol. 34(1), pages 117-124.
    • Handle: RePEc:eee:eneeco:v:34:y:2012:i:1:p:117-124
    DOI: 10.1016/j.eneco.2011.03.004
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    7. Youngho Chang & Zheng Fang & Shigeyuki Hamori, 2017. "Volatility and Causality in Strategic Commodities: Characteristics, Myth and Evidence," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(8), pages 162-178, August.
    8. Dowling, Michael & Cummins, Mark & Lucey, Brian M., 2016. "Psychological barriers in oil futures markets," Energy Economics, Elsevier, vol. 53(C), pages 293-304.
    9. Bahattin Buyuksahin, Thomas K. Lee, James T. Moser, and Michel A. Robe, 2013. "Physical Markets, Paper Markets and the WTI-Brent Spread," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    10. Jiliang Sheng & Juchao Li & Jun Yang, 2022. "Tail Dependency and Risk Spillover between Oil Market and Chinese Sectoral Stock Markets—An Assessment of the 2013 Refined Oil Pricing Reform," Energies, MDPI, vol. 15(16), pages 1-19, August.
    11. Caporin, Massimiliano & Fontini, Fulvio & Talebbeydokhti, Elham, 2019. "Testing persistence of WTI and Brent long-run relationship after the shale oil supply shock," Energy Economics, Elsevier, vol. 79(C), pages 21-31.
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    16. Ayman Omar, 2015. "West Texas Intermediate and Brent Spread during Organization of the Petroleum Exporting Countries Supply Disruptions," International Journal of Energy Economics and Policy, Econjournals, vol. 5(3), pages 693-703.
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    20. Giulietti, Monica & Iregui, Ana María & Otero, Jesús, 2014. "Crude oil price differentials, product heterogeneity and institutional arrangements," Energy Economics, Elsevier, vol. 46(S1), pages 28-32.

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    More about this item

    Keywords

    Oil price; Hasbrouck model; WTI Cushing problems; Rolling estimation;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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