The WTI/Brent oil futures price differential and the globalisation-regionalisation hypothesis

Abstract

This study examines the globalisation-regionalisation hypothesis in the WTI/Brent crude oil futures price differential by considering a set of the potential determinants at 1, 3 and 6 months to maturity contracts. To this end, we employ monthly data over the period 1993:1-2016:12 for a set of crude oil-market specific (convenience yield, consumption, production) and oil-futures market specific (open interest, trading volume) determinants. Our results can be outlined as follows. First, the WTI/Brent convenience yield spread can drive a wedge between the WTI and Brent oil futures prices for the nearby month and 3-month contracts. Second, the WTI/Brent oil production spread is a significant determinant for the 1-month, the 3-month and the 6-month to maturity contracts, while the WTI/Brent oil consumption spread is significant for the 6-month contract. Third, the WTI/Brent open interest spread appears to influence the oil futures price variability between the WTI and Brent for the 3-month and the 6-month contracts, while the WTI/Brent trading volume spread lends predictive power for the 1-month and the 3-month contracts. Fourth, the oil futures market does not appear to be globalised in every time period. We provide evidence of a regionalised oil futures market in the short-run horizon. Fifth, our robustness analysis lends support to the above findings. The findings of this study provide valuable information to energy investors, traders and hedgers.