Location Basis Differentials in Crude Oil Prices

29 Pages Posted: 15 May 2014 Last revised: 17 Mar 2019

See all articles by Phat V. Luong

Phat V. Luong

Rutgers Business School at Newark & New Brunswick

Bruce Mizrach

Rutgers University, Department of Economics

Yoichi Otsubo

University of Manchester - Alliance Manchester Business School

Date Written: March 15, 2019

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 January 2010, but it widens to record levels in the next two years. 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. We report on recent changes in the supply chain designed to profit from the Brent-WTI spread.

Keywords: Brent, West Texas Intermediate, Crude Oil, Basis Differential

JEL Classification: G12, G14, G18

Suggested Citation

Luong, Phat V. and Mizrach, Bruce and Otsubo, Yoichi, Location Basis Differentials in Crude Oil Prices (March 15, 2019). Available at SSRN: https://ssrn.com/abstract=2436908 or http://dx.doi.org/10.2139/ssrn.2436908

Phat V. Luong

Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

Bruce Mizrach (Contact Author)

Rutgers University, Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States
(848) 932-8636 (Phone)
(732) 932-7416 (Fax)

HOME PAGE: http://snde.rutgers.edu/

Yoichi Otsubo

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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