Revisiting WTI–Brent spread and its drivers

Sifat, Imtiaz; Zarei, Alireza; Ah Mand, Abdollah

Abstract

We made two key contributions to energy economics and finance by revealing new insights on the WTI–Brent spread (WBS). Our first exercise engages with the stylized facts of the WBS and its role as an indicator, identifying the time around the shale oil revolution as a turning point in the mean- and persistence-based shifts in the spread's time-series properties. The second exercise delves into the fundamental connection between the WBS and key US-based and international market factors. We utilized three sets of explanatory factors, representing demand, supply, and uncertainties. The data for this study were sourced primarily from Refinitiv Eikon and EIA, spanning from 1988 to 2020. The results affirmed demand-side variables to have predictive power for widening spreads, whereas supply-side factors, such as oil rig counts, trans-US pipeline flow, and import from Canada, contributed to spread shrinkage. This finding specifically held in robustness check using quantile-based regression. Supplementary causality tests revealed that economic conditions contain greater causal influence than market-based indicators, suggesting that the spread traders respond more to fundamental drivers than financial sentiments.

Citation

Sifat, I., Zarei, A., & Ah Mand, A. (2023). Revisiting WTI–Brent spread and its drivers. Energy Strategy Reviews, 50, Article 101206. https://doi.org/10.1016/j.esr.2023.101206

• Journal Article Type: Article
• Acceptance Date: Sep 13, 2023
• Online Publication Date: Sep 28, 2023
• Publication Date: 2023-11
• Deposit Date: Oct 5, 2023
• Publicly Available Date: Oct 6, 2023
• Journal: Energy Strategy Reviews
• Print ISSN: 2211-467X
• Electronic ISSN: 2211-4688
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 50
• Article Number: 101206
• DOI: https://doi.org/10.1016/j.esr.2023.101206
• Public URL: https://durham-repository.worktribe.com/output/1758244