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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.

Suggested Citation

  • 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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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Giulietti, Monica & Iregui, Ana María & Otero, Jesús, 2015. "A pair-wise analysis of the law of one price: Evidence from the crude oil market," Economics Letters, Elsevier, vol. 129(C), pages 39-41.
    3. Dowling, Michael & Cummins, Mark & Lucey, Brian M., 2016. "Psychological barriers in oil futures markets," Energy Economics, Elsevier, vol. 53(C), pages 293-304.
    4. 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).
    5. Elder, John & Miao, Hong & Ramchander, Sanjay, 2014. "Price discovery in crude oil futures," Energy Economics, Elsevier, vol. 46(S1), pages 18-27.
    6. 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.

    More about this item

    Keywords

    Oil price; Hasbrouck model; WTI Cushing problems; Rolling estimation;

    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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