Geographical Limits to Arbitrage in the Global Oil Market

17 Pages Posted: 27 Jul 2017

See all articles by Michael H. Grote

Michael H. Grote

Frankfurt School of Finance & Management

Matthew Zook

University of Kentucky

Thomas Heidorn

Frankfurt School of Finance & Management gemeinnützige GmbH

Date Written: July 24, 2017

Abstract

For more than 30 years, the world’s main indices for oil prices – WTI in the US and Brent in Europe – have moved in sync. This changed dramatically in 2011, when WTI started trading at a considerable discount to Brent for almost five years. This disparity violated the “law of one price” as arbitrage between markets should quickly reduce these differences. We trace the limits to arbitrage to the specificities of the WTI oil market and highlight how geography – manifest in material infrastructure and the design and regulation of markets – can pose sizable limits to arbitrage even in globally integrated commodity markets.

Keywords: Financial Geography, Limits to Arbitrage, Oil Markets, Oil Production

JEL Classification: Q41, L71, G15

Suggested Citation

Grote, Michael H. and Zook, Matthew and Heidorn, Thomas, Geographical Limits to Arbitrage in the Global Oil Market (July 24, 2017). Available at SSRN: https://ssrn.com/abstract=3007996 or http://dx.doi.org/10.2139/ssrn.3007996

Michael H. Grote

Frankfurt School of Finance & Management ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

Matthew Zook (Contact Author)

University of Kentucky ( email )

Lexington, KY 40506
United States

Thomas Heidorn

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

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