Causality in crude oil prices

Abstract

Crude oil markets witness growing disparity between the quality of crudes supplied and demanded in the market. The market share of low‐quality crudes is increasing due to the depletion of old fields and increasing demand. This is unnerving the practitioners and affecting the relevance of the traditional benchmark crudes due to the lack of lower quality benchmarks (Montepeque, 2005). In this article, we apply Granger causality tests to study the price dependence of 32 crudes in order to establish which crudes drive other prices and which ones simply follow general market trends. Our results indicate that some of the old benchmarks are still relevant while others can be disregarded. Our results also interestingly show that the low-quality Mediterranean Russian Urals crude, introduced in the late 1990s, has emerged recently as a significant driver of global prices.

Acknowledgements

The authors wish to thank Dr Jane Binner and two anonymous referees for helpful comments.

Notes

¹ Some additional information about problems with crude oil benchmarks can be found in Montepeque (2005) and Fattouh (2007).

² As available daily data do not consistently cover all key quality/geographical segments we rely on weekly data. This allowed us to construct the dataset covering crude oils of different quality coming from all major sources, both geographical (Africa, Americas, Asia and Europe) and political (OPEC and independent suppliers). Daily datasets utilized by other researchers (e.g. Bentzen (2007)) are constrained in that regard and do not allow for full coverage of aspects related to geography of supply and quality of crudes. The data used are comparable in terms of payment (with exception of Suez Blend crude prices which include 60 day credit) and terms of shipment (all prices are FOB and the destination ports do not change). This ensures that contractual factors such as time differentials should not affect the results.

³ Detailed results for so many series would require a large amount of space, so the results of the tests are not reported here – they can be provided by the authors on request.

⁴ When the calculations were repeated for different values of p, the results did not change.

⁵ Unfortunately, the available data does not allow us to perform the analysis at a continent or country group (EU in particular) level.