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Wti Brent Spread: An Analysis Of Factors That Influence Oil Price Differentials

2904 words - 12 pages

WTI-Brent Spread
An Analysis of Factors That Influence Oil Price Differentials

Yiming Huang
Dongming Li
Hanzheng Li
Shihui Qian

Fordham University
Financial Econometrics I
December 17, 2015

WTI-BRENT SPREAD

2

Contents
Abstract ......................................................................................................................................................... 3
1

Introduction ........................................................................................................................................... 3

2

Factors ...view middle of the document...

.............................................................................. 11
5.1

Model Selection........................................................................................................................... 11

5.2

Empirical Issues and Solutions ................................................................................................... 11

5.3

Issue of Overfitting...................................................................................................................... 12

5.4

Result of Stepwise Regression .................................................................................................... 12

6

Conclusion ........................................................................................................................................... 12

7

Reference ............................................................................................................................................. 14

8

Figures ................................................................................................................................................. 14
8.1

Figure 1: Historical Brent-WTI spread movements .................................................................... 14

8.2

Dickey Fuller Test Result ............................................................................................................ 15

8.3

Regression Result ........................................................................................................................ 17

WTI-BRENT SPREAD

3

Abstract
This paper examines the factors that drive the movement of WTI-Brent price differentials.
Since the shale oil boom in the US in 2010, WTI has been traded at a widened discount
compared to its counterpart. Such structural change has significant economic and political
implications and we aim to examine the factors both quantitatively and qualitatively. We have
run a multilinear regression model and a stepwise regression. These two different approaches
have yielded similar results that TED Spread, ADS, Baltic Dry Index, Open interest of two
futures, and rig productions are statistically significant to the dependent variable.

1 Introduction
West Texas Intermediate (WTI) and Brent are two leading global benchmarks for crude
oil pricing. WTI refers to the light sweet crude oil produced mostly in the Gulf coast, while Brent
is mostly produced in the North Sea. WTI is used as a pricing benchmark in the US for domestic
consumption and any oil imports. Crude oil flowing from Europe, Africa, and Asia to the West is
priced using Brent as a benchmark.
Historically, the price differentials between these two has stemmed from the physical price
difference due to specifics of contracts and the grade of oil, and two benchmarks have been
moving in tandem before 2010. However, starting in 2010, WTI has started to trade at a discount
and the spread has...

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