Determinants of the WTI-Brent Spread Revisited:

Transcription

1 Determinants of the WTI-Brent Spread Revisited: Before and after the Structural Break (Work in progress) Andreas Rathgeber* and Jerome Geyer-Klingeberg* *Institute of Materials Resource Management University of Augsburg Germany Dauphine Université Paris, 16th March

2 Development of WTI and Brent crude oil Source: U.S. Energy Information Administration 2

3 Review of the literature Structural breaks in WTI-Brent price spread Authors Sample period Structural break test Identified breaks Büyüksahin et al. (2013) 2000: :07 Chow (1960) 2008:11, 2010:12 Aruga (2015) 2001: :05 Bai and Perron (1998) 2003:01, 2005:01, 2007:01, 2009:02, 2011:02 Chen et al. (2015) 1988: :12 Leybourne et al. (2007) 2010:04 Li et al. (2015) 2004: :12 Hansen (1997) 2010:01 Liu et al. (2016) 2004: :12 Bai and Perron (1998) 2010:12 Ye and Karali (2016) 1993: :04 Bai and Perron (1998) 2005:05, 2010:12, 2013:04 Determinants of WTI-Brent spread Authors Sample period Methodology Main spread determinants Milonas and Henker (2010) 1991: :01 OLS regression Convenience yield Büyüksahin et al. (2013) 2004: :04 ARDL U.S. business climate, storage problems in Cushing, open interest, position of futures traders 3

4 Contribution Re-examination of WTI-Brent price spreads on a daily data set between 1995:01 and 2014:07 using autoregressive distributed lag models (ARDL) Advanced tests for detection of structural breaks Analysis of change in the spread determinants after structural break(s) Comprehensive investigation of convenience yield as proxy for crude oil inventories Examination of the balancing mechanism between spot and futures market 4

5 Spread calculation and convenience yield Normalized WTI-Brent spread: SPR t = S t WTI S t Brent S t Brent P t WTI : WTI opening price P t Brent : Brent closing price Convenience yield: CY t,t = R t,t + C t,t 1 T t ln F t,t ln P t P t,t : Three month U.S. treasury bill C t,t : Storage costs ($0.40 according to Ederington et al. 2012) F t,t : Three month crude oil futures price P t : P t WTI and P t Brent Three step estimation procedure following term structure of yield curves (Martellini 2003): 1. Calculation of CY t,t for different maturities 2. Interpolation of all data points using a cubic spline function 3. Evaluation of the spline function at the desired maturity 5

6 Data (I/II) Daily data set from 01/01/1995 through 23/07/2017 Variable Definition Source P WTI Western Texas Intermediate opening spot price (U.S. dollars per barrel) Datastream P Brent UK Brent nominal closing spot price (U.S. dollars per barrel) Bloomberg F WTI WTI opening futures crude oil price (U.S. dollars), 3 months to maturity NYMEX F Brent Brent closing futures crude oil price (U.S. dollars), 3 months to maturity ICE TS WTI Term spread, defined as F WTI P WTI Own calculation TS Brent Term spread, defined as F Brent P Brent Own calculation RF Three months U.S. treasury yield on actively traded non-inflation-indexed issues, adjusted to constant maturity Federal Reserve VL WTI Aggregate trading volume for WTI futures contracts NYMEX VL Brent Aggregate trading volume for Brent futures contracts ICE OI WTI Aggregate open interest for WTI futures contracts NYMEX OI Brent Aggregate open interest for Brent futures contracts ICE BD Baltic dry index pre-multiplied by the sign of the WTI-Brent spread Baltic Exchange 6

7 Data (II/II) 7

8 Summary statistics Mean Median Std. Dev. Min Max N SPR Spot SPR Future CY WTI CY Brent TS WTI TS Brent VL WTI VL Brent OI WTI OI Brent BD TR HR ST US ST EU HT CL Notes: This table presents summary statistics for the full sample period. Variable definitions can be obtained from Table 1. ***, **, * denote statistical significance at the 1%, 5% or 10% level. 8

9 Time Series Analysis - Structural Break 1. Detection of structural break in WTI-Brent spread Chow-test, CUSUM, CUSUMQ, Andrews test, Hansen test Result: 3 breaks (Only one break is always significant at 5% level) 2. Combined tests for unit root and structural break Bai/Perron (2003), Busseti/Harvey (1998), Harvey/Mills (2001) Lee/Strazicich(2001), Perron (1997), Zivot/Andrews (1992) and BIC Several Break types (Shift, Crash, Trend and combinations) Up to 5 breakpoints 9

10 Histogram of Combined Unit Root and Structural Break Tests 10

11 Results of Lee/Strazicich (2001) test 11

12 Breakpoint - Economic evaluation Absolute low of U.S. crude oil production: Oct 2008, Jan 2008 Source: U.S. Energy Information Administration 12

13 Cointegration analysis of WTI and Brent 13

14 Response of WTI (Brent) oil price to Cholesky One S.D. Brent (WTI) Innovation Estimated in first differences, VAR(2, k) with k {1,2} 14

15 Unit Root Tests 15

16 ARDL model ARDL p, q 1,, q n in following unrestricted error correction (ECM) p 1 n q j 1 n m SPR t = a 0 + a 1 t + ψ 1,i SPR t i + ψ j+1,i X j,t i + λ 1 SPR t 1 + λ j+1 X j,t 1 + δ k Z k,t + u t i=1 j=1 i=0 j=1 k=1 a 0 is the drift component t = max p, q 1,, q n,, T is the time trend component X = [CY WTI, CY Brent, VL WTI, VL Brent, OI WTI, OI Brent, BD, ST US, ST EU ] Z = [HT, CL, TR, HR, SB] u t is the white noise error term ψ 1,,ψ n symbolize the error correction dynamics λ 1,, λ n represent the long-run relationship ARDL bounds test: H 0 F : λ 1 = = λ n+1, using critical values by Pesaran et al. (2001) 16

17 ARDL results Bounds test 17

18 ARDL results Error correction term 18

19 ARDL results Long-run elasticities (I/II) 19

20 ARDL results Long-run elasticities (II/II) 20

21 Concluding remarks WTI-Brent spread shows significant structural change in 2010 The convenience yield, as proxy for crude oil inventories, is the most important spread determinant The impact of the convenience yield changed since the break in 2010 Also the trading volume in WTI futures markets as well as the economic situation and temperature differences between the U.S. and Europe drive the size of the WTI-Brent spread. The importance of trading volume in WTI futures is reduced. 21

22 References Argua, K., Testing the International Crude Oil Market Integration with Structural Breaks. Economics Bulletin 35, Bai, J., Perron, P., Computation and analysis of multiple structural change models. Journal of Applied Econometrics 18, doi: /jae.659. Busetti, F., Harvey, A., Testing for the Presence of a Random Walk in Series with Structural Breaks. Journal of Time Series Analysis 22, doi: / Büyüksahin, B., Lee, T.K., Moser, J.T., Robe, M.A., Physical Markets, Paper Markets and the WTI-Brent Spread. The Energy Journal 34, doi: / Chen, W., Huang, Z., Yi, Y., Is there a structural change in the persistence of WTI Brent oil price spreads in the post-2010 period? Economic Modelling 50, doi: /j.econmod Harvey, D.I., Mills, T.C., A Note on Busetti-Harvey Tests for Stationarity in Series with Structural Breaks. Journal of Time Series Analysis 24, doi: / Johansen, S., Juselius, K., Maximum likelihood estimation and inference on cointegration with application to the demand for money. Oxford Bulletin of Economics and Statistics 52, doi: /j mp x. Lee, J., Strazicich, M.C., Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks. The Review of Economics and Statistics 85, doi: /

23 References Li, Y., Mizrach, B., Otsubo, Y., Location basis differentials in crude oil prices. Working Paper at Rutgers University. Liu, P., Stevens, R., Vedenov, D., Physical market and WTI/Brent price spread. 34th USAEE/IAEE North American Conference, Tulsa, Oklahoma. Milonas, N.T., Henker, T., Price spread and convenience yield behaviour in the international oil market. Applied Financial Economics 11, doi: / Perron, P., Further Evidence on Breaking Trend Functions in Macroeconomic Variables. Journal of Econometrics 80, doi: /S (97) Pesaran, M.H., Yongcheol, S., Smith, R.J., Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics 16, doi: /jae.616. Robert, E.F., Granger, C.W.J., Co-Integration and Error Correction: Representation, Estimation, and Testing. Econometrica 55, Ye, S., Karali, B., Estimating Relative Price Impact: The Case of Brent and WTI. Paper presented at 2016 Agricultulral & Applied Economics Association Annual Meeting, Boston. Zivot, E., Andrews, D.W., Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis. Journal of Business & Economic Statistics 10, doi: /