My presenation for my thesis defence. I succesfully graduated from the Executive Master in Maritime Economics and Logistics and gained extensive knowledge for the oil market.

1. Explaining the oil price spread
between WTI and Brent during U.S.
shale oil revolution
Dimitrios Kontaxis Master Thesis
MEL Class of 2015-2016
September 12, 2016

2. Outline
I. Introduction
II. Literature Review
III. Methodology
IV.Main Results
V. Conclusions

3. Introduction
0
20
40
60
80
100
120
140
160
1/3/00 1/3/01 1/3/02 1/3/03 1/3/04 1/3/05 1/3/06 1/3/07 1/3/08 1/3/09 1/3/10 1/3/11 1/3/12 1/3/13 1/3/14 1/3/15 1/3/16
DollarsperBarrel
WTI Brent
Figure: Crude oil spot prices Source: Thomson Reuters
• WTI and Brent oil prices were
moving in tandem until late 2010
with WTI trading at a slight
premium.
• WTI started decreasing in level
with Brent not following the
same downward movement.
• From 2014 and onwards the two
crude oil prices seem to move
together again with WTI trading
at a slight discount compared to
Brent.
Research Objective: Explore the properties of the relationship between the two oil benchmarks by analyzing the
structure and the underlying drivers of WTI-Brent spread movement.
Research Question: What is the relationship of the oil price spread from 2010 until 2016 and which factors can
explain this relationship?

4. Outline
I. Introduction
II. Literature Review
III. Methodology
IV.Main Results
V. Conclusions

5. Literature Review
• Until 2010, there was long-term link between the two crude oil prices given by the following equation:
𝑃 𝑊𝑇𝐼 = 𝑃𝐵𝑅 + 𝐶 𝐵𝑅 + 𝐷
• Price spread WTI-Brent experienced a structural change on 15 December 2010. The oil price spread
moved from a stationary to a non stationary process.
• Events that affected the prices independently:
WTI BRENT
• U.S. shale oil revolution
• Increasing Canadian oil imports to PADD2
• Capacity constraints in the transportation
infrastructure
• U.S. Refinery Configuration
• Inability to export crude oil
• Arab Oil Spring
• Fukushima accident

6. Outline
I. Introduction
II. Literature Review
III. Methodology
IV.Main Results
V. Conclusions

7. Methodology
• Chow test for structural break: The Chow test is an F test which shows whether time series data from two
different time periods could show the same relationship or not. The Chow test can only be used when
someone has a priori idea of the date that the coefficients of a time series have changed between the two
sub-samples defined by the break date. This test can be applied to test whether a major shock in the oil
market has changed the spread relationship.
• Unit Root tests for (non)stationarity: The main difference between stationary and non stationary time series
lies to the fact that when random shocks happen, the first one is mean reverting, meaning that there is a
tendency to return to its long-term mean, while the shocks in the second one have a persistent effect
causing the time series to be in the so called random walk.
• Auto Regressive Distributed Lag model: The use of the ARDL model helps to test for long-term
relationships between core variables without ending to spurious regressions since the long run coefficients
can be consistent when you associate stationary with non stationary time series data or even when you
regress non stationary variables. As such the form of our general model will be:
𝑆𝑝𝑟𝑒𝑎𝑑 𝑡 = 𝑎 + 𝑏𝑆𝑝𝑟𝑒𝑎𝑑 𝑡−1 + 𝑐0 𝑋𝑡 + 𝑐1 𝑋𝑡−1 + 𝜀𝑡

8. Outline
I. Introduction
II. Literature Review
III. Methodology
IV.Main Results
V. Conclusions

9. Main Results
0
5000
10000
15000
20000
25000
30000
35000
40000
May-2010
Aug-2010
Nov-2010
Feb-2011
May-2011
Aug-2011
Nov-2011
Feb-2012
May-2012
Aug-2012
Nov-2012
Feb-2013
May-2013
Aug-2013
Nov-2013
Feb-2014
May-2014
Aug-2014
Nov-2014
MonthlyThousandsbarrels
East Coast (PADD 1) Receipts by Rail from Midwest (PADD 2) of Crude Oil (Thousand Barrels)
Gulf Coast (PADD 3) Receipts by Pipeline from Midwest (PADD 2) of Crude Oil (Thousand
Barrels)
Hypothesis: The WTI-Brent spread experienced
a structural break in the first quarter of 2014.
Figure: Monthly oil movements from PADD2 to PADD1 and PADD3 Source: U.S. EIA
The oil price spread of WTI-
Brent experienced a structural
break on 13 March 2014.
Chow test for structural break
Keystone
XL pipeline
expansion

10. Main Results
Based on the break date on 13 March 2014, we examine the process of the price spread
with unit root tests:
• From 15 December 2010 until 13 March 2014, the oil price spread follows a non
stationary process.
• From 14 March 2014 until 31 May 2016, the oil price spread has formed a new
stationary relationship with WTI trading at a slight discount compared to Brent.

11. Main Results
Based on the ARDL model, we came up with the following results:
1. The oil price spread WTI-Brent has a positive relationship with the oil pipeline flows from
PADD2 to PADD3.
2. The oil price spread WTI-Brent has a negative relationship with the number of U.S. operational
oil rigs.
3. The oil price spread WTI-Brent has a negative relationship with the Canadian oil imports to
PADD2.

12. Outline
I. Introduction
II. Literature Review
III. Methodology
IV.Main Results
V. Conclusions

13. Conclusions
• Large discounts in the WTI price caused the spread to significantly decrease in 2011 with researchers
finding a structural change in the relationship between WTI and Brent on 15 December 2010.
• The oil price spread formed a non stationary relationship.
• U.S. shale oil revolution along with increasing Canadian oil imports to PADD2 substantially increased
the storage levels in Cushing, Oklahoma, where the WTI is priced.
• Increasing oil supplies were coincided with inadequate transportation infrastructure, inability to export
crude oil and unsuitable refinery configurations.

14. Conclusions
Added Value:
• The evolution of the U.S. oil transportation system trying to adapt to the new standards, came as a
shock to the oil market and the oil price spread experienced a structural change on 13 March 2014.
• The spread formed a new stationary relationship with WTI trading at a slight discount compared to
Brent.
• There is a positive relationship between the price spread and the oil pipeline flows from PADD2 to
PADD3. Expansions and reversals of the pipeline system are associated with an upward pressure to
the price spread.
• There is an inverse relationship between the price spread and the U.S. oil production as well as the
Canadian oil imports. Increasing oil supply causes the price spread to decrease.

15. Thank you for your attention!