Causality in Crude Oil Prices

Abstract

The world market of crude oil has three well established benchmarks used for pricing of other crudes: West Texas Intermediate, Europe Brent and Dubai Fateh. The relevance of these are however declining, as the output of the benchmarks is decreasing, and as an increasing share of world crude produced is of worse quality than the benchmarks (pointed out by e.g. Montepeque, 2005). Particularly the segment of medium density, sour crudes is lacking a reliable benchmark. We apply Granger causality tests to study the price dependencies of 32 crude oils empirically. The aim is to establish what crudes are setting the prices and what crudes are just follow the general market trend. The investigation is performed globally as well as for different quality segments, geographical segments and the segments of OPEC and non-OPEC crudes. The results indicate that crude oil price analysts should follow at least four different crudes that are if not benchmarks, at least good price indicators. While the well-established benchmarks WTI and Brent still lead the market, they are not the only crude prices worth paying attention to. In particular, Russian Urals drives global prices in a significant way, and Iran Seri Kerir is a significant price setter within OPEC. Dubai Fateh does not display any significant influence as a price setter. The lack of a reliable benchmark for medium density, sour crudes is thereby confirmed.Granger causality; crude oil; benchmark; West Texas Intermediate; Europe Brent; Dubai Fateh; Russian Urals; Iran Seri Kerir; price dynamics