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Crude Oil Price Differentials : An empirical analysis on the factors behind the price divergence between WTI and Brent

Heier, Martin; Skoglund, Sindre
Master thesis
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URI
http://hdl.handle.net/11250/276135
Date
2014
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  • Master Thesis [4657]
Abstract
The main purpose of

our thesis is to examine the long

-

run

relationship be

tween WTI

and Bren

t

.

Historically, the prices fluctuated around a constant differential, where

WTI traded above Brent due to its slightly higher quality.

Recently, the differential

has been reversed as B

rent has traded at a premium to WTI since 2010.

We analyze

the unusual behavior in

the

price

relationship

with

the use of an Engle

-

Granger two

-

step test for cointegration to assess if the relationship has ended

,

and whether a new

has been formed. We also d

ecompose the

WTI

-

Brent

spread

to examine if the

deviation

can be accrued to supply or demand

conditions

. Finally, we build

an

empirical model to

determine

what factors

have

had

a significant impact on

the

spread’s divergence.

We find that the long

-

run

rel

ationship between WTI and Brent ended in January 2010,

and

that

a new relationship

was established

early

2014.

However, the new relationship

is different from its predecessor as Brent is now

being

traded at a premium to WTI.

From our empirical findings

we

infer

that

insufficient

pipeline infrastructure

at

Cushing is significant in explaining the spread’s divergence. We also

conclude

that

shipping costs

significantly

affected

the spread

and

have

prolong

ed the divergence

between WTI and Brent

.

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