Indexing Oil from a Financial Point of View: A Comparison between Brent and West Texas Intermediate

Abstract

Brent Crude and West Texas Intermediate (WTI) are major indices for purchases of oil worldwide among with some others such as OPEC basket. Brent is traditionally a European index whereas WTI representing slightly sweeter and lighter crude is more applicable in USA. Until 2010, the spread between WTI and Brent hasn't been more than few Dollars. However in recent years, the spread is widening in favor of Brent and then returning to the mean. WTI which historically taken over Brent, has fallen below Brent which is now claimed to be the global oil index for the World. This is sometimes argued with the Shale production and over-supply in the U.S. and several macroeconomic events such as Libyan crisis. The aim of this paper is to analyze which of these indices is a better indicator for the energy industry. The variables from NYSE exchange traded funds namely Energy Select Sector SPDR ETF (XLE), Teucrium WTI Crude Oil ETF (CRUD), and United States Brent Oil ETF (BNO) for the period December 1994 and September 2014. The variables are analyzed for long-run and short-run relationships with unit root tests, vector autoregression models (VAR), and vector error correction models (VECM) as well as cointegration and Granger causality tests.Keywords: Energy Modeling, Oil Indexing, Cointegration, Granger CausalityJEL Classifications: C58, P48, Q37