Price discount, inventories and the distortion of WTI benchmark

Kao, Chung-Wei; Wan, Jer-Yuh

doi:10.1016/j.eneco.2011.03.004

Cited by 47 publications

(30 citation statements)

References 34 publications

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“…Although the fundamental drivers of WTI prices are varied, the close link to inventory levels at Cushing has led in recent years to an oversupply based downward pressure on WTI prices, with the crude oil trading at a significant discount to Brent (Fattouh, 2011). Kao and Wan (2012) support this in their analysis and show that, amongst the many fundamental drivers of WTI prices, inventory levels at Cushing have a tangible influence. Indeed, Kao and Wan (2012) present evidence that WTI has failed to reflect market conditions due to this Cushing inventory effect, while they also propose that Brent has surpassed WTI as the leading reference price and has done so since 2004.…”

Section: Data Descriptionmentioning

confidence: 53%

“…As identified earlier, Fattouh (2011) suggests that WTI has broken down as a global benchmark and rationalises this with particular reference to the outflow bottleneck issues that have prevailed around Cushing in recent years, constraints which have led to an oversupply based downward pressure on WTI prices and trading at a significant discount to its counterpart, Brent (Fattouh, 2011). Kao and Wan (2012) support this view and argue that amongst the many fundamental drivers of WTI prices there is a close link between price and inventory levels at Cushing. Kao and Wan (2012) provide evidence that WTI has failed to reflect market conditions in recent years and indeed put forward the case that Brent has surpassed WTI as the leading reference price since 2004.…”

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confidence: 54%

“…Kao and Wan (2012) support this view and argue that amongst the many fundamental drivers of WTI prices there is a close link between price and inventory levels at Cushing. Kao and Wan (2012) provide evidence that WTI has failed to reflect market conditions in recent years and indeed put forward the case that Brent has surpassed WTI as the leading reference price since 2004. Jin et al (2012) similarly demonstrate that Brent is responsive to global price shocks while WTI appears to be increasingly disconnected.…”

mentioning

confidence: 54%

“…Indeed, this bottleneck has led in recent years to downward pressure on WTI prices, with markets trading the crude oil at a significant discount to Brent. Kao and Wan (2012) likewise highlight that over recent years WTI has failed to reflect market conditions and point again to the close link between price and inventory levels at Cushing, while they also propose that Brent has surpassed WTI as the leading reference price since 2004. Jin et al (2012) demonstrate that Brent is responsive to global price shocks while WTI appears to be increasingly disconnected from such shocks.…”

Section: Introductionmentioning

confidence: 99%

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Psychological barriers in oil futures markets

2016

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WTI and Brent futures are tested for the presence of psychological barriers around $10 price levels, applying a multiple hypothesis testing approach for statistical robustness. Psychological barriers are found to be present in Brent prices but not in WTI prices, which is argued to be due to the more prominent role that Brent plays as a global benchmark and, based on recent behavioural finance research, the greater complexity inherent in Brent fundamental value determination. Brent particularly displays evidence that when breaching a $10 barrier level from below with rising prices, the trend is for prices to fall on average subsequently. Similar behavioural-based patterns are evidenced at the $1 barrier level for the WTI-Brent spread. We show that psychological barriers only appear to influence prices in the pre-credit crisis period of 1990-2006, with such effects dissipating during the crisis and as markets reverted back to wider economy focused fundamentals. A range of reaction windows are applied with the main finding being that the trading potential around such psychological barrier levels is primarily in the immediate 1-5 days following a breach. The research contributes to the scant existing research on psychological influences on energy market traders, and suggests strong potential for further application of behavioural finance theories to improving understanding of energy markets price dynamics.

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Section: Data Descriptionmentioning

confidence: 53%

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confidence: 54%

Section: Introductionmentioning

confidence: 99%

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Psychological barriers in oil futures markets

2016

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“…It has been aggregated to monthly frequency by taking mean values for the corresponding months. Following, for example, Bu [104], Karali and Power [105] and Kao and Wan [106], strategic petroleum reserves (SPR) has been excluded from the data in order to measure private consumers' demand only. Indeed, the change in SPR happens rather due to political reasons, and they are influenced mainly by the occurrence of natural disasters and, moreover, are prone to geopolitical decisions.…”

Section: Datamentioning

confidence: 99%

Determining Time-Varying Drivers of Spot Oil Price in a Dynamic Model Averaging Framework

Drachal

2018

Energies

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This article presents results from modelling spot oil prices by Dynamic Model Averaging (DMA). First, based on a literature review and availability of data, the following oil price drivers have been selected: stock prices indices, stock prices volatility index, exchange rates, global economic activity, interest rates, supply and demand indicators and inventories level. Next, they have been included as explanatory variables in various DMA models with different initial parameters. Monthly data between January 1986 and December 2015 has been analyzed. Several variations of DMA models have been constructed, because DMA requires the initial setting of certain parameters. Interestingly, DMA has occurred to be robust to setting different values to these parameters. It has also occurred that the quality of prediction is the highest for the model with the drivers solely connected with the stock markets behavior. Drivers connected with macroeconomic fundamental indicators have not been found so important. This observation can serve as an argument favoring the hypothesis of the increasing financialization of the oil market, at least in the short-term period. The predictions from other, slightly different modelling variations based on DMA methodology, have happened to be consistent with each other in general. Many constructed models have outperformed alternative forecasting methods. It has also been found that normalization of the initial data, although not necessary for DMA from the theoretical point of view, significantly improves the quality of prediction.

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Return and volatility transmission between China's and international crude oil futures markets: A first look

Yang

Zhou

2020

Journal of Futures Markets

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We examine return and volatility transmission between the newly established crude oil futures in China and international major crude oil futures markets using intraday data. For the first time, we document evidence for cointegration relationships among these oil futures markets. Both China's and Oman's oil futures markets react to deviations from their long-run equilibrium with West Texas Intermediate and Brent oil futures. There is also new evidence for asymmetric volatilities and correlations across these oil futures markets. Furthermore, the Chinese oil futures have stronger linkages with the international major futures markets than Oman futures.

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Price discount, inventories and the distortion of WTI benchmark

Cited by 47 publications

References 34 publications

Psychological barriers in oil futures markets

Psychological barriers in oil futures markets

Determining Time-Varying Drivers of Spot Oil Price in a Dynamic Model Averaging Framework

Return and volatility transmission between China's and international crude oil futures markets: A first look

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