WTI and Brent futures pricing structure

Abstract

WTI and Brent crude oil futures are competing pricing benchmarks and they jockey for the number one position as the leading futures market. The price spread between WTI and Brent is also an important benchmark itself as the spread affects international trade in oil, refiner margins, and the price of refined products globally. In addition, the shapes of the WTI and Brent futures curves reflect supply and demand fundamentals in the U.S. versus the world market, respectively. On the analysis of the relationship between the two futures prices, we identify a structural break in the WTI Brent price spread in January 2011 and a break in the corresponding shapes of the futures curves around the same time. The structural break was a consequence of a dramatic rise in U.S. production due to fracking, a series of supply disruptions in Europe, binding storage constraints, and the U.S. crude oil export ban. These events are studied in the context of a simulation model of world oil prices. We reproduce the stylized facts of the oil market and conclude that the 2011 break in pricing structure was consistent with standard commodity storage theory. (C) 2018 Elsevier B.V. All rights reserved.