Physical Markets, Paper Markets and the WTI-Brent Spread

Energy Journal, Vol. 34, No. 3, 2013

Posted: 7 Oct 2013

See all articles by Bahattin Buyuksahin

Bahattin Buyuksahin

ADIA

Thomas K Lee

Energy Information Administration - US DOE

James T. Moser

American University - Kogod School of Business

Michel A. Robe

University of Illinois at Urbana-Champaign

Date Written: December 1, 2012

Abstract

Since the Fall of 2008, the benchmark West Texas Intermediate (WTI) crude oil has periodically traded at unheard-of discounts to the corresponding Brent benchmark. This discount is not reflected in the price spreads between Brent and other benchmarks that are directly comparable to WTI. Drawing on extant models linking oil inventory conditions to the futures term structure, we test empirically several conjectures about how calendar and commodity spreads (nearby vs. first-deferred WTI; nearby Brent vs. WTI) should move over time and be related to storage conditions at Cushing. We then investigate whether, after controlling for macroeconomic and physical market fundamentals, spread behavior is partly predicted by the aggregate oil futures positions of commodity index traders.

Keywords: Crude Oil, Brent, WTI, LLS, Spread, Fundamentals, Inventories, Cushing, Paper Markets, Commodity Index Trading (CIT)

JEL Classification: E31, Q4, G140

Suggested Citation

Buyuksahin, Bahattin and Lee, Thomas K. and Moser, James T. and Robe, Michel A., Physical Markets, Paper Markets and the WTI-Brent Spread (December 1, 2012). Energy Journal, Vol. 34, No. 3, 2013 . Available at SSRN: https://ssrn.com/abstract=2205304

Bahattin Buyuksahin

ADIA ( email )

211 Corniche Road
Abu Dhabi, Abu Dhabi PO Box3600
United Arab Emirates
+971505496600 (Phone)

Thomas K. Lee

Energy Information Administration - US DOE ( email )

1000 Independence Avenue, SW
Washington, DC 20585
United States

James T. Moser

American University - Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States

Michel A. Robe (Contact Author)

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

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