Closer to One Great Pool? Evidence from Structural Breaks in Oil Price Differentials

59 Pages Posted: 15 Feb 2019

See all articles by Michael Plante

Michael Plante

Federal Reserve Bank of Dallas; Indiana University Bloomington - Center for Applied Economics and Policy Research

Grant Strickler

Federal Reserve Banks - Federal Reserve Bank of Dallas

Multiple version iconThere are 2 versions of this paper

Date Written: February 5, 2019

Abstract

We show that the oil market has become closer to \one great pool," in the sense that price differentials between crude oils of different qualities have generally become smaller over time. We document, in particular, that many of these quality-related differentials experienced a major structural break in or around 2008, after which there was a marked reduction in their means and, in many cases, volatilities. Several factors explain these shifts, including a growing ability of the global refinery sector to process lower-quality crude oil and the U.S. shale boom, which has unexpectedly boosted the supply of high-quality crude oil. Differentials between crude oils of similar quality in general did not experience breaks in or around 2008, although we do find evidence of breaks at other times. We also show that these structural breaks can affect tests of stationarity for many price differentials.

Keywords: crude oil price differentials, oil, structural breaks, stationarity

JEL Classification: Q40, C22

Suggested Citation

Plante, Michael D. and Strickler, Grant, Closer to One Great Pool? Evidence from Structural Breaks in Oil Price Differentials (February 5, 2019). USAEE Working Paper No. 19-387, Available at SSRN: https://ssrn.com/abstract=3334609 or http://dx.doi.org/10.2139/ssrn.3334609

Michael D. Plante (Contact Author)

Federal Reserve Bank of Dallas ( email )

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Indiana University Bloomington - Center for Applied Economics and Policy Research ( email )

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Grant Strickler

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

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