Cointegration between oil spot and future prices of the same and different grades in the presence of structural change

Abstract

The purpose of this study is to examine whether crude oil spot and futures prices of the same and different grades are cointegrated using a residual-based cointegration test that allows for one structural break in the cointegrating vector and high-frequency data. We choose the US WTI and the UK Brent as the representative crudes for this analysis since these two crudes have well-established spot and futures markets. We find that spot and future prices of the same grade as well as spot and futures prices of different grades are cointegrated. We examine potential causes of structural change as revealed by the cointegration test in terms of events that have impacted on world oil markets as well as discuss the implications of the results for hedge managers, investors and regulators.