The Dynamics of Crude Oil Price Differentials
By B. Fattouh. 2010
188 citations recorded by the source corpus.
Crude oil price differentials are modelled as a two-regime threshold autoregressive (TAR) process using the method proposed by Caner and Hansen [Caner, M., Hansen, B.E. Threshold autoregression with a unit root. Econometrica 2001; 69; 1555-1596.]. While standard unit root tests suggest that the prices of crude oil of different varieties move closely together such that their price differential is stationary, the TAR results indicate strong evidence of threshold effects in the adjustment process to the long-run equilibrium. These findings suggest that crude oil prices are linked and thus at the very general level, the oil market is 'one great pool' (Adelman, M.A. International oil agreements. The Energy Journal 1984; 5; 1-9.). However, differences in the dynamics of adjustment suggest that within this one pool, oil markets are not necessarily integrated in every time period and hence the dynamics of crude oil price differentials may not follow a stationary process at all times. Although the development of a liquid futures market around the crude oil benchmarks has helped make some distant markets more unified, arbitrage is not costless or risk-free and temporary breakdowns in the benchmarks can lead to decoupling of crude oil prices.
Subfields: Economics and Econometrics, Renewable Energy, Sustainability and the Environment
View Paper: https://www.semanticscholar.org/paper/1459b1df107986328825d65300b274278d9e89fd
How researchers see this paper
The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.
In Economics and Econometrics
- Lutz Kilian
- Robert K. Kaufmann
- B. Fattouh
- Lavan Mahadeva
- George Filis
- Christiane Baumeister
- Robert J. Vigfusson
- Matteo Manera
In Renewable Energy, Sustainability and the Environment
- Robert K. Kaufmann
- B. Fattouh
- Lavan Mahadeva
- Lutz Kilian
- George Filis
- Christiane Baumeister
- Robert J. Vigfusson
- Matteo Manera
Citations in the corpus
- The Role of Speculation in Oil Markets: What Have We Learned So Far? (2013, background): “On the other hand, Fattouh (2010b) shows that the emergence of highly liquid crude oil futures markets has helped physical crude oil markets become more integrated by reducing transaction costs and facilitating arbitrage across geographically distant markets and across crude oil of different…”
- The role of market fundamentals and speculation in recent price changes for crude oil (2011, background): “This conclusion is re-inforced by results that indicate crude oil prices ‘error correct’ faster when their price spread exceeds some threshold, which presumably represents the costs of arbitrage (Fattouh, 2010).”
- Evolution of the World Crude Oil Market Integration: A Graph Theory Analysis (2016, unknown): “Milonas and Henker (2001) examine the price and volatility behaviour ofWest Texas Intermediate (WTI) crude oil and Brent crude oil and find that the two oil markets are not fully integrated.”