Pirrong WTI Report 091116 - Bauer College of Business · 2010. 1. 7. · Energy Markets Director,...
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1 An Evaluation of the Performance of Oil Price Benchmarks During the Financial Crisis Craig Pirrong Professor of Finance Energy Markets Director, Global Energy Management Institute Bauer College of Business University of Houston I. Introduction The events of late‐summer, 2008 through the spring of 2009 have attracted considerable attention to the performance of oil price benchmarks, most notably the Chicago Mercantile Exchange’s West Texas Intermediate crude oil contract (“WTI” or “CL” hereafter) and ICE Futures’ Brent crude oil contract (“Brent futures” or “CB” hereafter). In particular, the behavior of spreads between the prices of futures contracts of different maturities, and between futures prices and cash prices during the period following the Lehman Brothers collapse has sparked allegations that futures prices have become disconnected from the underlying cash market fundamentals. The WTI contract has been the subject of particular criticisms alleging the unrepresentativeness of the Midcontinent market as a global price benchmark. I have analyzed extensive data from the crude oil cash and futures markets to evaluate the performance of the WTI and Brent futures contracts during the LH2008‐FH2009 period. Although the analysis focuses on this period, it relies on data extending back to 1990 in order to put the performance in historical context. I have also incorporated some data on physical crude market fundamentals, most
Transcript of Pirrong WTI Report 091116 - Bauer College of Business · 2010. 1. 7. · Energy Markets Director,...
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AnEvaluationofthePerformanceofOilPriceBenchmarksDuringtheFinancialCrisisCraigPirrong
ProfessorofFinanceEnergyMarketsDirector,GlobalEnergyManagementInstitute
BauerCollegeofBusinessUniversityofHouston
I. Introduction
Theeventsoflate‐summer,2008throughthespringof2009haveattracted
considerableattentiontotheperformanceofoilpricebenchmarks,mostnotablythe
ChicagoMercantileExchange’sWestTexasIntermediatecrudeoilcontract(“WTI”
or“CL”hereafter)andICEFutures’Brentcrudeoilcontract(“Brentfutures”or“CB”
hereafter).Inparticular,thebehaviorofspreadsbetweenthepricesoffutures
contractsofdifferentmaturities,andbetweenfuturespricesandcashpricesduring
theperiodfollowingtheLehmanBrotherscollapsehassparkedallegationsthat
futurespriceshavebecomedisconnectedfromtheunderlyingcashmarket
fundamentals.TheWTIcontracthasbeenthesubjectofparticularcriticisms
allegingtheunrepresentativenessoftheMidcontinentmarketasaglobalprice
benchmark.
Ihaveanalyzedextensivedatafromthecrudeoilcashandfuturesmarketsto
evaluatetheperformanceoftheWTIandBrentfuturescontractsduringthe
LH2008‐FH2009period.Althoughtheanalysisfocusesonthisperiod,itrelieson
dataextendingbackto1990inordertoputtheperformanceinhistoricalcontext.I
havealsoincorporatedsomedataonphysicalcrudemarketfundamentals,most
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notablystocks,astheseareessentialinprovidinganevaluationofcontract
performanceandtherelationbetweenpricingandfundamentals.Myconclusions
areasfollows:
1. TheOctober,2008‐March2009periodwasoneofhistoricallyunprecedentedvolatility.Byavarietyofmeasures,volatilityinthisperiodwasextremelyhigh,evencomparedtothemonthssurroundingtheFirstGulfWar,previouslythehighestvolatilityperiodinthemodernoiltradingera.Moreover,thebehavioroffundamentalmeasures,includingstocks,washistoricallyextraordinaryaswell.
2. ForbothCLandCB,thepricecollapsethatoccurredinFall2008wasaccompaniedbyadramaticincreaseincontango(measuredbythespreadbetweenthefirstandsecondnearbyprices),andanincreaseinthevolatilityinspreadsbetweenfutureswithdifferentmaturities.
3. Byavarietyofmeasures,thehedgingperformanceofbothWTIandBrentdeclinedforavarietyofcashinstrumentsduringtheperiodofheightenedvolatility.ThisdeclineinhedgingperformancewasmostpronouncedforfrontmonthWTI.
4. HedgingperformanceforfirstmonthWTIwithrespecttoMidcontinentcrudestreamswassound.Byavarietyofmeasures,thehedgingperformanceofbothWTIandBrentdeclinedforavarietyofwaterbornecash‐tradedcrudestreams,includingthoseintheUSGulf,duringtheperiodofheightenedvolatility.
5. TheperformanceofthesecondmonthWTIcontractwascomparabletothatofthefirstandsecondmonthBrentcontracts.
6. Thedeclineinhedgingperformance,andincreaseinspreadvolatility,occurredatthesametimeasanunprecedentedincreaseinthestocksofoilheldatCushing,Oklahoma(20millionbarrels),intheUS(66millionbarrels)andtheOECDasawhole(110millionbarrelsinAugust,2008‐March,2009).
7. Formostoftheperiodstudied,thereisastrongrelationshipbetweenCushingstocksandspreads,andthisrelationshipisthatpredictedbyeconomictheory;namely,thathigherstocksareassociatedwithariseinthedeferredpricerelativetothenearbyprice.Thisisconsistentwithamarketbeingdrivenbyfundamentals.
8. DuringOctober,2008‐March,2009,therelationbetweenWTIspreadsandstocksbecamemorevariable,butthisrelationstillwasconsistentwiththespread‐stockrelationreflectingeconomicfundamentals.Thatis,highercontangoswereassociatedwithhigherstocks.
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9. WithrespecttoBrent,duringOctober,2008‐March,2009,therelationbetweenBrentspreadsandUSstockswasoppositethatpredictedbyeconomictheory;stocksandBrentspreadsmovedinoppositedirectionsduringthisperiod.BecauseUSandOECDstocksexhibitedsimilarmovementsduringthistimeperiod,thissuggeststhatBrentspreadsmaynothavebeenreflectingsupplydemandfundamentals(asproxiedforbyOECDstocks).1
10. UScashcrudespreadsexhibitedbehaviorsimilartoWTIfuturesspreads.Theyexperiencedlargemovesatthesametimes.ThissuggeststhatUSmarket‐wideconditions,ratherthanfactorsspecifictotheWTIcontract,werethedecisivedeterminantsofpricingbehaviorduringthisperiod.
11. ThebehavioroftheWTI‐WestTexasSour(WTS)spreadprovidesfurtherevidencethatconditionsintheMidcontinentwerethedecisivefactor.BothofthesecrudestreamsutilizeCushingstorage.DuringtheNovember,2008‐March,2009period,thefrontmonthWTI‐frontmonthWTSspreadexhibitedbehaviorsimilartothatobservedinpriorperiods,butthesecondmonthWTI‐frontmonthWTSspreadwassubstantiallymorevolatile.ThisisconsistentwithphysicalmarketconditionsatCushing(andtheMidcontinentmoregenerally)beingtheprimarydriverofpricerelationsduringthisperiod.
Oneinterpretationoftheseresultsisthat:(a)theunprecedentedincreasein
fundamentaluncertaintycausedadeclineinthehedgingperformanceofboththe
WTIandBrentcontracts,and(b)thesimilarlyunprecedentedsurgeinstocksthat
occurredsimultaneouslycausedasignificantincreaseinthecontango,mostnotably
intheWTImarket.
Inparticular,themetastasizingfinancialcrisiscaused:
• Asubstantialdeclineinthedemandforcrudeproducts(andhencecrudeoil).Inparticular,distillatedemandplummetedduringthisperiod.
• Asubstantialbuild‐upofcrudeinventoriesaroundtheworld,butmostnotablyintheUSMidcontinent;sinceoilsupplydoesnotadjustintheshortrun,thesteepdropindemandresultedinlargeandrapidaccumulationofstocks.
1DuetothelowerfrequencyofOECDinventorydata,itisnotpossibletotestthisconjecturerigorously.
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• Alargeandrapiddropinpricesofcrudeoilandrefinedproducts.
Theaccumulationofstockswasaworld‐widephenomenon.Thereare
extensivepublishedreports,includingthosereleasedbytheInternationalEnergy
Agency,thatlargeamountsofcrudewerestoredintankersatsea.Thisishighly
unusual,andreflectsthemarkedlyunusualconditionsprevailingatthetime.The
substantialinventorybuildatCushingwasthuspartofaglobalphenomenon,
althoughtheUSMidcontinentmorereflectedthismore(andmoretransparently)
thanelsewhere.Forthemostpart,thenearbyWTIfuturescontractwasaccurately
reflectingtheseCushingandMidcontinentfundamentals,andwasconsistentwith
thepatternsobservedforOECDstocks.
Theseconditionsdominatedthemarketforseveralmonths.Eventually,
outputcutsreducedthedemandforstorageandpermittedareturnofmoretypical
pricingrelationships,andimportantly,arestorationofthepreviouslyobserved
hedgingeffectivenessoftheprimaryworldcrudepricingmarkers,includingWTI.
Basedonthisinterpretation,andthetotalityoftheextensivedataanalysis,I
concludethatthebehavioroftheWTIfuturescontractduringthefinancialcrisis
reflectedthetrulyunprecedentedconditionsprevalentduringthatperiod.
Fundamentalvolatilitywasextraordinarilyhighduringthisperiod.Moreover,the
collapseindemandcausedbytheacuteworldwideeconomiccontractionmadeit
optimaltoincreasesharplytheamountofoilinstorage.Thesefactorscombinedto
injectvolatilityinfuturesspreadsandcash‐futuresspreads.
However,in2Q09,hedgingperformancesoftheWTIandBrentcontracts
havereturnedtoapproximatelytheirpre‐crisislevels.Thus,thedatadonot
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supportageneralclaimthatthehedgingperformanceofWTI(orBrent)has
declinedexceptundertrulyexceptionalcircumstances.
Therefore,itisimportantnottoreadtoomuchintothehedgingperformance
ofthefuturesmarketduringOctober,2008‐March,2009.Thisbehaviorwasquite
explicablebytheextremeshockstofundamentalsthatoccurredduringthis
remarkableperiod,andisnotaharbingerofalong‐termdeclineinperformance.A
returntomorenormalcircumstances,andmostimportantly,arecoveryofdemand
thatleadstothereturnofinventoriestomoretypicallevels,willresultareturnto
thepricingbehaviorexperiencedbeforethecrisis.
Theremainderofthisreportisorganizedasfollows.SectionIIsetsoutthe
statisticalmethodsdeployedandthedatautilized.SectionIIIanalyzesthebehavior
ofvolatility;ofspreadsandbasis;andhedgingeffectivenessoftheWTIandBrent
contracts,withafocusontheNovember,2008‐March,2009period.SectionIV
evaluatesthebehavioroffundamentals,notablyUSstocks,Cushingstocks,and
refiningactivity.SectionVsummarizesthereport.
II. MethodologyandData
Ievaluatethebehaviorofseveralindiciaofoilcontractperformance.Ifirst
reviewthebehaviorofthespreadbetweenthefirstandsecondnearbycontractsfor
theWTIandBrentcontracts.IthenevaluatethebasisbetweenthefrontmonthCL
andCBcontracts,andseveralcashmarketindicators.Thefutures‐cashpairs
examinedare:
• CL‐DatedBrent
• CL‐Dubai
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• CL‐GulfCoastGasoline(“GCG”)
• CL‐LouisianaLightSweet(“LLS”)
• CL‐MARS
• CL‐WestTexasSour(“WTS”)
• CB‐DatedBrent
• CB‐Dubai
• CB‐Gasoil
• CB‐SingaporeGasoil
Then,foreachofthesefutures‐cashpairs,Iuseavarietyofmethodsto
estimatethecorrelationbetweenthefuturespricechangeandthecashprice
change.Correlationisameasureofthehedgingeffectivenessofafuturescontract,
thatis,theamountofriskthatcanbereducedbyusingthefuturescontractasa
hedge.Specifically,thefractionofvariancethatcanbeeliminatedbyusingthe
futurescontractasahedgeofaparticularcashgradeequalsthesquareofthe
correlationbetweenthefuturespricechangeandthecashpriceforthatgrade.
Itiswellknownthatcorrelationscanvarythroughtime.Therefore,itis
imperativetoutilizemethodsthatpermitsuchtimevariation.Iusetwoapproaches.
Thefirstistoestimate“rolling”correlations.Thatis,Iestimatecorrelations
betweeneachfutures‐cashpairoverathree‐monthlongperiod,rollingthatperiod
forwardintimebyoneobservationperiodfromthebeginningofthedatasettothe
end.
Thesecondistoestimateabivariate“GARCH”model.TheGARCHmodelisa
timeseriesmodelofvariancesandcovariances.Itpositsthatvariancesand
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covariancesvarythroughtimeinaspecificway.Inparticular,variancesatagiven
pointintimedependonvariancesatthepreviousdate,andthesquaredinnovation
(unexpectedpricemovement)ineachprice.Covariancesbehavesimilarly.Thisis
oneofthemostwidelyutilizedmethodsinthetimeseriesanalysisoffinancial
prices.
Inprevious,publishedresearch,Ihaveshownthatvariancesandcovariances
incommoditypricescanvarywithfuturesspreads.Moreover,theorypredictssuch
arelationship.Adeepbackwardationtypicallyoccursundertightsupply‐demand
conditions,andpricesareusuallymorevolatilegivensuchtightfundamentals.A
steepcontangotypicallyreflectsconstraintsonstoragecapacity.Underthese
circumstances,theseconstraintslimittheabilitytoaccommodatefundamental
supplyanddemandshocksbyadjustinginventories,requiringpricestobearthe
burdenoftheadjustmenttotheseshocks.
Specifically,inoilmarkets,variancesandcovariancescandependonwhether
themarketisincontangoorbackwardation,andthemagnitudeofthe
contango/backwardation.2Tocapturethiseffect,Iestimatemodelsthatallow
variancesandcovariancestodependonthelevelsofbackwardationandcontango
2CraigPirrong,Metallgesellschaft:APrudentHedgerRuined,oraWildcatteronWallStreet?J.ofFuturesMarkets(1995).Themodelsestimatedinthatpaper,andherein,havemultipleequations.Foreachcommoditypair,thereisacovarianceequation.Inaddition,foreachelementofthecommoditypair,thereisavarianceequation.Thesethreeequationsallowtheestimationofthetime‐varyingvariancesofpricesforeachelementofthepairandthetime‐varyingcovariancebetweenthem;giventhisinformation,itispossibletoestimateatime‐varyingcorrelation(becausethecorrelationistheratioofthecovariancetothesquarerootoftheproductofthevariances).
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inthemarket.Irefertothisas“backwardandcontangoadjustedGARCH”(“GARCH
BCAG”).
Theoryalsopredictsthatcorrelationsbetweenfuturesofdifferent
maturities,andbetweencashandfuturespricescandependonfuturesspreads.For
instance,thecash‐and‐carryarbitragerelationshipisattenuatedwhenstocksare
lowandthemarketisinbackwardation.Underthesecircumstances,thecorrelation
betweennearbyanddeferredfuturespricesislikelytobelow.Similarly,ifthe
marginalcostofstoragebecomesquiteinelasticwheninventoriesbecomelarge,
then(a)themarketwillbeinalargecontango,and(b)nearby‐deferredspreadswill
bevolatile,andcorrelationsbetweenthesepriceslow,becausesmallfundamental
shockscanhavealargeeffectonthemarginalcostofstorage,causingnearbyand
deferredpricestomovedifferentlyinresponsetosuchshocks.
IestimatetwodifferenttypesofGARCHBCAGmodels.Inthefirstmodel,the
covariancebetweenthefuturespricechangeandthecashpricechangedependson
(a)aconstant,(b)thelaggedcovariance,(c)thelaggedproductbetweenthe
unexpectedfuturespricechangeandtheunexpectedcashpricechange,(d)thelag
ofthesquareofthelogdifferencebetweenthenearbypriceandthefirstdeferred
price,ifthatdifferenceispositive,and(e)thelagofthesquareofthelogdifference
betweenthenearbypriceandthefirstdeferredprice,ifthatdifferenceisnegative.
Variable(d)measurestheeffectsofbackwardationonthecovariancebetween
futuresandcash,whereasvariable(e)measurestheeffectsofcontangoonthis
variance.
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Thesecondmodelincorporatesvariables(d)and(e),butassumesthatwhen
thenearbyanddeferredfuturesareequal,thecorrelationbetweenthefuturesand
cashpricechangesisaconstant(estimatedbythemodel).
Bothmodelsassumethatthevariancesofthecashandfuturespricesdepend
on(a)aconstant,(b)thelaggedvariance,(c)thelaggedsquaredunexpectedprice
change,(d)thelagofthesquareofthelogdifferencebetweenthenearbypriceand
thefirstdeferredprice,ifthatdifferenceispositive,and(e)thelagofthesquareof
thelogdifferencebetweenthenearbypriceandthefirstdeferredprice,ifthat
differenceisnegative.
Thefuturesdatausedintheanalysisweredailysettlementpricesobtained
fromtheCommodityResearchBureau.ThecashpriceswerefromPlatts,and
providedbytheChicagoMercantileExchange.
Sincethevariouscashpriceandfuturespricemarkersweredeterminedat
differenttimesonagiventradingday,formostoftheanalysisitisimpracticalto
utilizedailypricedata.Forinstance,themeasuredclose‐to‐closepricechangein
Dubaicrudeoccursbetween0430ETand0430ETthefollowingday,whereasthe
measuredclose‐to‐closepricechangeinWTIoccursbetween1430ETonsuccessive
tradingdays.Thus,informationthatcanaffectNYMEXpricechangesonaparticular
dayatatimesubsequenttothedeterminationoftheDubaipriceonthatdaywill
onlybereflectedintheDubaipricedataforthefollowingday.Thistimemis‐match
tendstoreducemeasuredcorrelationsindailydata.Asaresult,tominimizethe
impactoftimemismatch,Iperformallcorrelationanalysesonweeklydata.
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III. Volatility,Spreads,andBasis
Thefigurelabeled“CLFront‐LLSVariance(BCAG)”representsthevariance
oftheweekly(log)changeintheWTInearbyfuturesprice,andthevarianceofthe
weekly(log)changeintheLLScashprice.3Thefiguredepictstheweeklyvariances
overtheperiod3January,1990‐14July,2009.
Thefiguredemonstratesthatthevariancesofcashandfuturespricesvary
overtime.Mostnotable,though,isthebehaviorofvolatilityin2008and2009.
Specifically,thesevarianceswerelow,byhistoricalstandards,duringtheperiodof
historicallyhigh(nominal)oilpricesinthesummerof2008.Moreover,these
varianceswereextremelyhighcommencinginthefallof2008,andreachedapeakin
thewinterof2009.Indeed,thevarianceswereapproximately4timeshigherat
theirpeakin2009,thanthehighestpost‐GulfWarIpeaks,andmorethandouble
thelevelsobservedevenduringthefirstGulfWar.
Convertingthesevariancesintoannualizedstandarddeviations(volatilities),
whereastheaveragelevelofvolatilityinthepost‐GulfWar‐pre‐FinancialCrisis
periodwasontheorderof33percentperyear,inFebruary,2009,thisvolatilitywas
over100percent.Thus,theperiodoftheFinancialCrisiswasoneofunprecedented
volatilityinoilprices.
TheFinancialCrisisalsohadadramaticeffectonthespreadsbetween
nearbyanddeferredoilfuturesprices,bothWTIandBrent.Twofiguresillustrate
thebehaviorofthesespreads.
3Thebasicresultsdonotdependonthechoiceofestimationmethod,orthecashpriceindicator.
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Thefigurelabeled“CLFront‐BackLogDifference”graphsthedifference
betweenthelogoftheCLfrontmonthandthelogoftheCLbackmonthprice,forthe
July,2005‐July,2009period.Thefigurelabeled“CBFront‐BackLogDifference”
graphsthedifferencebetweenthelogoftheCBfrontmonthandthelogoftheCB
backmonthprice,fortheJuly,2005‐July,2009period.4
Bothfiguresshowthatthespreadswererelativelystablepriortothelate‐
summerof2008,forWTIvaryingbetweenapproximately‐.04(contango)and.01
(backwardation).Then,inOctober,2009,the(log)spreadforbothWTIandBrent
begantodeclinedramatically,beforereturningtopreviously‐observedlevelsinthe
springof2009.Moreover,forbothWTIandBrent,thespreadgraphsexhibitsharp
downwardspikesintheDecember,2008‐February,2009period(forWTI)and
November,2008‐May,2009(forBrent).5
ThegeneraldramaticdeclineinspreadsinbothWTIandBrentcanbe
explainedreadilygiventhesubstantialeconomiccontractionandfinancialcrisis
thatoccurredduringthisperiod.Economictheorypredictsthatasubstantial
declineindemandforacommoditymakesitoptimaltoaccumulateinventories,
especiallywhenitisverycostlytoadjustoutput(asisthecaseinoil).Pricesadjust
intocontangotoprovideafinancialincentivetoengageinsuchaccumulation.
When,asisthecaseinoil,themarginalcostofstorageisincreasingintheamount
4Sincetherearenotimemismatchissuesassociatedwiththesefuturesspreads,thesegraphsareconstructedusingdailydata.Thelogarithmtransformationmitigatestheeffectofpricelevelsonthebasis.Alogdifferenceisessentiallyapercentagedifference.Therelationshipismuchmorevariablewhenthelogtransformationisnotused.5ThereisanupwardspikeintheWTIspreadon22September,2008.ThisoccurredontheexpirydateoftheOctobercontract.
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stored(due,forinstance,tooperationalconstraintsinstoragefacilities,orthe
necessitytoutilizeseabornestorage),verywidecontangosmayberequiredinthe
faceofaverylargeeconomicshockthatsharplyreducesthedemandforoil,and
henceincreasessharplytheoptimalamountofoiltostore.Thatis,theverylarge
changeinspreadsduringthefinancialcrisisisexactlythekindofpriceresponseto
beexpectedinthefaceofaneconomicshockthatdramaticallyreducesdemand.It
isalso,toadegree,consistentwiththeincreaseinoilinventoriesobservedoverthis
period;thisissueisdiscussedinmoredetailinSectionIVbelow.
The“spikes”inthespreadsaremoredifficulttoattributetoeconomic
fundamentals,andinsteadaremorelikelyreflectiveoftechnicalfeaturesintheWTI
andBrentmarkets.ThethreelargedownwardspikesintheWTIspreadoccurred
on12/19/2008,1/15/2009,and2/12/2009;therewasalargeupwardspikeinthis
spreadon2/19/2009.The12/19/2008and2/19/2009spikesoccurredon
contractexpirydates.The1/15/2009and2/12/2009occurredafewdaysbefore
contractexpiration.
ThethreespikesinBrentoccurredon11/13/2008,3/16/2008,and
5/14/2009.Thefirsttwoareexpirydates,thethirdadaypriortoexpiry.
Theoccurrenceofthesespikesonornearexpirysuggeststhattheyweredue
totechnicalfactorsassociatedwiththeendoftradingoffuturescontracts,rather
thanfundamentalfactors.
Astatisticalanalysissupportsthisview.Inthe1/3/1990‐6/30/2008period,
thestandarddeviationofthechangeintheCLlogspreadpriortothelastthreedays
intheexpirymonthwas.0022,whereasinthelastthreetradingdaysthisvolatility
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was.0085.Thus,evenbeforethefinancialcrisis,thespreadwassubstantiallymore
volatileinthefewdayspriortoexpirationthanintheperiodbetweentheprior
expirationandthefourthtradingdayofthemonth.Thisagainprovidesevidence
thattechnicalfactorsrelatedtoexpirationwereaffectingpricebehaviorasexpiry
neared.
ThedisparitybecameevenmoreextremeinLH2008‐FH2009.Inthatperiod,
thespreadvolatilitypriortothelastthreetradingdayswas.012,butthespread
volatilityinthelastthreedayswas.0334.Thus,duringtheheightofthefinancial
crisis,spreadvolatilitywasextremelyhighduringthelastthreetradingdays,even
incomparisontoitsalreadyelevatedlevelduringthefinancialcrisis,butpriortothe
lastthreetradingdays.Thissuggeststhatthetechnicalfactorsbecameevenmore
importantduringthisperiodoftime.
Brentexhibitedsimilarbehavior,thoughnotquiteassevere.Fortheperiod
priorto30June,2008,thespreadvolatilitywas.0023priortothelastthreedaysof
theexpirymonth(almostexactlythesameasobservedforWTI),and.0051during
thelastthreedays.Thus,technicalfactorsassociatedwithexpirationevidently
affectedtheBrentcontractpriortothefinancialcrisis,butnottothesameextentas
observedforWTI.Duringthefinancialcrisis,LH2008‐FH2009,Brentspread
volatilitypriortothelastthreetradingdaysofagivencontractwaselevated,.0045,
andthevolatilityduringthelastthreedayswasalsoelevated,to.0109.Soagain,
thereisevidenceoftheimpactofexpiration‐driventechnicalfeaturesonBrent;that
thesetechnicalpressuresweregreaterduringthefinancialcrisisthanbefore;but
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thattheeffectofthecrisisonthesetechnicalpressureswaslesssevereforBrent
thanWTI.
Myinterpretationofthesefindingsisasfollows.Theunprecedented
economicuncertaintyassociatedwiththefinancialcrisiscreatedunprecedented
volatilityinoilcashandfuturesprices.Moreover,thesubstantialeconomic
contractionassociatedwiththecrisisdramaticallyreduceddemandforoil,making
itoptimaltoincreaseoilinventoriesbyamarkedamount.Naturally,themarket
movedintocontangotorewardsuchinventoryaccumulations.Thecombinationof
volatilityandincreasesinoilstorageexacerbatedthetechnicalfrictionsthat
contributetobasisvolatilitylateinthetradingofanexpiringcontract,leadingto
especiallyelevatedbasisvolatilityfortheWTIcontract.Subsequentanalysis,
notablythatofstocks,willsupportthisinterpretation.
Thiscanbeinterpretedanotherway.Themarketforspreadsbetween
nearbyanddeferredcontractsisessentiallydiscoveringthe(shadow)priceof
storage.ThemarketforstorageinCushingisnotacentralizedmarket,butasearch
market.Onewouldexpectthatadramaticincreaseinfundamentaluncertaintyin
theoilmarket(demonstratedgraphicallybythehugevolatilityspikediscussed
above)andasurgeindemandforstoragecapacity(demonstratedbythedramatic
increaseinoilin‐storeinCushingasdocumentedbelow)wouldleadtoincreased
transactionscostsinthestoragemarketduetothenecessityofnegotiatingmore
transactionsinconditionsofuncertainty(andlikelyinformationasymmetry).One
wouldexpecttoothatinasearchmarket,greateruncertaintywouldleadtogreater
dispersionacrosstransactionsandovertimeinthepriceofstorage.Inturn,these
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developmentswouldtendtowidenthespreadandmakeitmorevolatileasthe
marketgropedtodiscoverthepriceofstorageunderconditionsofhistoric
uncertainty.
ItshouldbenotedthatUScashmarketspreadsexhibitedbehaviorsimilarto
thatofNYMEXWTI,althoughtoasomewhatlesserdegree.Thecharttitled“USOil
Nearby‐DeferredSpreads”depictsthenearby‐deferredspreadforLLS,WTIcash,
andWTS,aswellasNYMEXWTIfortheNovember,2008‐February,2009period.
Notethatthecashspreadsspikedownwardeachtimethereisadownwardspikein
thenearbyNYMEXWTIspread;theNYMEXWTIspikesaremorepronounced
(exceptforcashWTI),butthecoincidenceofthesespikesprovidesevidencethat
thesemovementsweredrivenbybroaderfundamentalforcesintheUSoilmarket,
ratherthansomethingpeculiartotheNYMEXCLcontract.Noteparticularlythatthe
cashWTIspreadisalmostidenticaltotheNYMEXWTIspread;thisindicatesthat
convergenceoccurredevenduringtheseexceptionalepisodes.Moreover,with
respecttotheDecember,2008spike,theJanuary‐FebruarycashWTIspread
widenedevenfurtherinthedayaftertheexpiryoftheNYMEXJanuarycontract.6
ThissuggeststhatconditionsintheCushingcashmarket,notsomethingpeculiarto
theNYMEXexpiryalone,drovethepricingrelationsduringthisperiod.
Relatedly,thebehaviorofNYMEXWTI‐WTSspreadssuggeststhat
constraintsinMidcontinentstorage,orfrictionsinthemarketforthisstorage,
playedthemajorroleindrivingpricerelationsduringthisperiod.Notethatinthe
December,2008‐June,2009periodthefrontmonthCL‐WTSspreadwasnot
6ThecashcontracttradesforatleastonemoredaythantheNYMEXfuture.
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especiallyvolatile(especiallycomparedwithitsbehaviorinthe2005‐2007period,
andcomparedtothespreadbetweenfrontmonthCLandothercashgrades),but
thebackmonthCL‐frontmonthWTSspreadwasverywideandvolatileduringthe
December,2008‐March,2009period.Moreover,thisspreadspikedupwhenother
frontmonthCLspreadsspikeddown.GiventhatWTS(Midland)isintheregion
tributarytoCushing,thissuggeststhatCushing/Midcontinentphysicalmarket
factorsweredecisiveduringthishighlyvolatileperiod.
Putdifferently,althoughNYMEXfrontmonthWTIpricerelations(spreads)
wereextraordinaryduringthistime,therelationsbetweenWTSandothercash
gradesweresimilarlyremarkable.Thus,ratherthanreflectingsomethingspecificto
thefuturesmarketortheCLfuturescontract,thespreadbehaviorduringtheperiod
ofthefinancialcrisiswasreflectingfundamentalconditionsintheMidcontinent
market.
Theseresultssuggestthatpricerelationscanbestressedbyextreme
fundamentalconditions,andthatthesestressesarelikelytoaffectthefrontmonth
contractmostacutely.Althoughthisfindingisnotimmaterial,itsimportance
shouldnotbeoveremphasized.Bythetimethattheexpiringcontractsmostclearly
reflectedtheextraordinarycircumstancesprevailingattheheightofthecrisis,the
vastmajorityofopeninterestinthecontractshadalreadyliquidated,mostofit
rollingtothefirstdeferredcontract.Thus,mosthedgers,andmostusingthe
contractforspeculativepurposes,werenotexposedtotheeffectsofthesefactors.
Thosemostatriskwerethoseholdingfinanciallysettledpositionswithcashflows
tiedtothesettlementpriceoftheWTIcontractonexpirationday.Moreover,aswill
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bedemonstratedinthenextsection,thefirstdeferredcontract(towhichmost
hedgersandspeculatorswillhaverolledpriortothethirdtradingdaybefore
expiration)demonstrablysufferedsubstantiallylessfromtheeffectsofeconomic
volatilityandcontracttechnicalfeatures.
IV. HedgingEffectiveness
Theanalysisofhedgingeffectivenessisbasedonseveralsetsoffigures,each
setcorrespondingtoadifferentmethodforestimatingcorrelationsbetweenfutures
andcashpricechanges.Figureswith“Correlation”inthetitledepictrolling
correlationsbetweenthefuturesprices(frontandbackmonth)andcashpricein
thetitle.Thosewith“BCAG”inthetitlearebasedontheBCAGmethodology,while
thosewith“GARCHBCAG”arederivedusingtheGARCHBCAGmethodology.Each
figuredepictshedgingperformancebeginninginMarch,1990andendinginJuly,
2009.Ipresentthetimeseriesofhedgingeffectivenessoveralongtimeperiodin
ordertoputtheeventsofLH2008‐FH2009inhistoricalperspective.
SomegeneralobservationsareinorderbeforeIpresentamoredetailed
analysis.First,regardlessofthemethodology,correlation/hedgingeffectiveness
variesovertime.Therefore,itisnecessaryandusefultoevaluateperformance
duringaparticularperiodwithreferencetoperformanceoverotherperiods.
Second,thelevelandvariabilityofcorrelationsalsodiffersacrossproducts.Not
surprisingly,correlationsformoreclosely‐relatedcommodities(e.g.,CLandLLS)
tendtobehigher,andexhibitlessvariationthancorrelationsforlessclosely‐related
ones(e.g.,CLandGCG).
18
Withthoseconsiderationsinmind,firstconsidertherollingcorrelation
charts.
Anexaminationoftherollingcorrelationssupportsseveralfindings:
1. CorrelationsforWTIfrontandbackmonthcontractsdeclinedcommencinginlate‐2008,andreturnedtolevelscomparabletothoseobservedinearlierperiodsattheendof1Q09.Thetimingofthedeclinedifferedamongcashgrades,withtheDubaicorrelationdecliningbeginninginOctober,andtheLLSandBrentcorrelationsdecliningbeginninginDecember.
2. ForfrontmonthWTI,thedeclineincorrelationwaslessseverethanhadbeenobservedatearliertimes,withtheexceptionofDubai,wherehedgingeffectivenessplungedto0beforereboundingsharply.
3. DeclinesinbackmonthWTIcorrelationwerefarlessseverethanforfront
month.Moreover,mostofthedeclinesweremodest,andofamagnitudesmallerthannumerousdeclinesobservedinprioryears.Thus,therollingcorrelationanalysisimpliesthatthefinancialcrisisdidnothavearemarkablylargeimpactonthehedgingeffectivenessofthebackmonthcontract.
4. Brentrollingcorrelationsalsodeclinedduringtheperiodofthefinancial
crisis.Thecorrelationdeclineswereofamagnitudesimilartothoseobservedfrequentlyinprioryears.
5. IncontrasttoWTI,thedeclineinBrenthedgingeffectivenesswas(slightly)
largerforthefirstdeferredcontractthanthefrontmonthcontract.
6. ForbothWTIandBrent,thelargestdeclineinhedgingeffectivenesswasobservedforDubai,andforthiscashgrade,thedeclineinWTIhedgingeffectivenesswasgreater.Thisisnotsurprising,giventhegenerallycloserrelationbetweenDubaiandBrent.
Inbrief,therollingcorrelationdatashowthatthefinancialcrisisandits
associatedeffectsoncrudemarketscausedadeclineinhedgingeffectiveness,but
despitetheunprecedentednatureofthecrisis,thedeclineinhedgingeffectiveness
wasnotunprecedentedlylarge.ThefrontmonthWTIcontractwasmostadversely
affected.ThislikelyreflectsthetechnicalfactorsdiscussedinsectionsIIIandV.In
19
contrast,thefirstdeferredWTIhedgingeffectivenesswasnotasseriouslyaffected,
andbehavedsimilarlytotheeffectivenessoftheBrentcontracts.
NextconsidertheGARCHBCAGhedgingeffectivenessestimates.
7. WTIfrontmonthandbackmonthhedgingeffectivenessdeclined4Q08,andreboundedtoreachpre‐crisislevelsattheendof1Q09.ThedeclineincorrelationforthefrontmonthwaslargerduringthisperiodthanestimatedpreviouslyforCLFront‐DatedBrent,CLFront‐Dubai,CLBack‐Dubai,CLFront‐GCG,andCLFront‐LLS.7Thus,withtheexceptionofDubai,thedeclineincorrelationforthefirstdeferredcontractduringthefinancialcrisiswasofamagnitudesimilartootherdeclinesobservedinthe1990‐FH2008period.
8. WiththeexceptionofGasoil,Brentfrontmonthandbackmonthhedgingeffectivenessalsodeclined4Q08,andreboundedto(approximately)pre‐crisislevelsattheendof1Q09.Theobservedcorrelationdeclineswerenotunprecedentedlylarge,becausesimilar(orlarger)declinesoccurredinprioryears.
Finally,considertheresultsfortheBCAGanalysis.
9. Again,WTIhedgingeffectivenessdeclinedduringtheperiodofthefinancialcrisisforallcashgradesconsidered.Thedeclineswerelargerforthefrontmonthcontract.Moreover,thedeclinesweretypicallylargerduringLH09‐FH08thanhadbeenobservedinprioryears..
10. Brentcorrelationsdeclinedduringtheperiodofthecrisis,butthesedeclinesweresmallrelativeto(a)thedeclinesthathadbeenobservedpreviously,and(b)thedeclinesobservedforWTI.
11. ThedifferentialperformancebetweenWTIandBrentundertheBCAG
measurereflectsthefactthatinthismodeltheestimatedeffectofcontangooncorrelationissmallerforBrent,thanWTI.ThiscouldreflecttheimpactofconstraintsattheCushingdeliverypointonWTIcashpricedynamics.AswillbediscussedinsectionVbelow,largeCushingstoragelevels(andconsequentlylargeCLcontango)clearlyaffectsWTIpricing.
Overall,thehedgingeffectiveness/correlationresultsdemonstratethatthe
financialcrisisdiddegradehedgingeffectivenessforboththeWTIandBrent
futures.ThedeclinewasmostpronouncedforfrontmonthWTI.Thecorrelation
7TherewasinsufficientdatatoestimatethismodelforMARS.
20
declinesforbackmonthWTIandthetwoBrentcontractsconsideredwere
comparable,andfortwoofthethreemeasuresconsidered,ofamagnitudesimilarto
declinesobservedinprior,non‐crisisperiods.
OneinterestingfindingisthatthedeclineinCLfrontmonthhedging
effectivenessforWTSwasnoticeablysmallerthanforothercashgradesconsidered.
Thisistrueforallthreemeasuresofhedgingeffectiveness:rollingcorrelation,and
thetwoGARCHmeasures.ThisprovidesevidencethatMidcontinentpricerelations
werelessaffectedthanrelationsbetweentheMidcontinentandotherregions.
GiventhatWTS(basedonMidland,TXprices)istributarytotheNYMEXdelivery
locationatCushing,thissuggeststhatallMidcontinentoilswerereflectingcommon
fundamentalsrelatedtoconditionsattheCushingmarket,andthatthe
Cushing/Midcontinentfundamentalsweresomewhatuniqueandlocation‐specific.
V. FundamentalsandPriceBehavior
Althoughunusualpricebehaviorcansometimesbeidentifiedthroughan
examinationofpricedataalone,quantitydatacangreatlyimprovetheabilityto
identifysuchbehavior,andtoassistinthediagnosisofitscauses.Inthissection,I
examinefuturespriceandinventorydatatogethertoshedadditionallightonthe
performanceofcrudeoilpricebenchmarksduringtheLH2008‐FH2009period.
Theeconomictheoryofstorablecommoditiesimpliesthatfuturesspreads
(e.g.,thedifferencebetweenthenearbyanddeferredprices)shouldcovarywith
inventoriesofthecommodityinaspecificway.Inparticular,thedifferencebetween
thedeferredpriceandthenearbypriceshouldbegreater,thegreaterthequantity
ofinventories.Thisrelationshipshouldbeclosestbetweenspreadsandstocksat
21
thecontractdeliverypoint(ratherthanamoreaggregatedinventoryfigure),andfor
contractswithrelativelyshorttimestoexpiration.Itisimportanttonotethat
spreadsdonotcauseinventories,orviceversa;pricesandinventoriesare
determinedsimultaneously,andtherelationjustdescribedisanequilibriumone.
Deviationsinthepredictedrelationshipareindiciaofpotentialproblemsin
theperformanceofafuturescontract.Forinstance,highinventoriesinconjunction
withaseverebackwardationisaclassicindicatorofasqueeze.
Thefiguretitled“CLFront‐BackSpreadvs.CushingStocks”depictsthe
relationbetweenthespreadbetweenthefirstdeferredandnearbyWTIcontracts
(verticalaxis)andcrudeoilinventories(inmmbbl)attheCLdeliverypoint,
Cushing,OK.The(weekly)dataextendfrom9April,2004to17July,2009.
Notethatformostofthepointsinthefigure,thetheoreticallypredicted
relationholds;spreadsrisewithstocks.Thesepoints,forthemostpart,correspond
tostocklevelsoflessthan30millionbarrels,andmostofthesepointscorrespondto
datesbefore1October,2008.Indeed,forthe9April,2004‐26September,2008
period,thecorrelationbetweenCushingstocksandWTIspreadsis.7192,indicating
thatthespreadsandinventoriescovariedaspredictedbythefundamentals‐based
economictheoryofstorablecommoditypricebehavior.
Therearesomepointsinthegraphthatareoutliers.Inparticular,thepoint
withaspreadof$8.49/bbl,andaninventorylevelof28.68mmbblisdistantfrom
theotherpointsinthescatter.Thispointcorrespondstotheexpirationdateofthe
January,2009contract(19December,2008).Giventhespreadlevelsofaround
$2/bblforotherpointswithsimilarstocklevels,thislargespreadstandsout.It
22
shouldbenoted,moreover,thatcashWTIspreadswerealmostidentical,and
remainedthiswidethedayaftertheexpirationoftheJanuarycontract.
Moreover,itisinformativetonotethatthedispersionofspreadsforstock
levelsofapproximately35mmbblissubstantiallygreaterthanthedispersion
observedforlowerstocklevels.Thesespreadsrangefrombetween$.78/bbland
$6.06/bbl.Incontrast,forstocklevelsofabout25mmbbl,thespreadsrangefrom
$.54/bblto$3.16/bbl,andallbutoneofthesespreadsislessthan$2.00/bbl.
Thisgreaterdispersioninspreads,whichcorrespondsprimarilytothefirst
quarterof2009,likelyreflectsatleastinpart,ahighlyinelasticmarginalcostof
storageatCushing.Suchinelasticitywouldbeexpectedasthequantitystoredat
Cushingnearseffectivecapacity.AlthoughnominalcapacityatCushingwasfar
higherduringthisperiod(approximately47.5mmbbl),effectivecapacitycanbe
lowerduetooperationalconstraints,andthefactthatdifferenttypesofoilthat
cannotbemixedareheldininventoryatCushing.
Moreover,asnotedearlier,themarketforspreadsisdiscoveringthepriceof
storage.ThemarketforstorageinCushingisasearchmarket,andanegotiatedone.
Highuncertainty,andasurgeofoilseekingstorageinCushing(reflectedinthelarge
increaseinstocksatCushingdiscussedbelow)wouldtendtoincreasesearchand
negotiationcosts,andleadtogreaterdispersioninthepriceofstorageacross
transactionsnegotiatedatapproximatelythesametime,andovertime.Thus,one
wouldexpectthatthemassiveincreasesinuncertaintyandthedemandforstorage
wouldleadtogreaterdispersioninpricerelationsasthemarketgropedtodiscover
23
theappropriateshadowpriceofstorageinhighlydynamic,uncertain,andfluid
conditions.
Eventhoughtherewasgreaterdispersioninthespread‐stocksrelationinthe
periodafterthefinancialcrisishitwithitsfullforce,itisevidentthatfundamentals
werestillrelevantindeterminingthisrelation.Thecorrelationbetweenspreads
andstocksduringthe3October,2008‐17July,2009periodwas.4844.Thisisnot
ashighasobservedinprioryears,whichprovidesfurtherevidenceoftheeffectof
storageconstraintsatCushing,butitisstillpositiveastheorypredicts,andis
economicallydifferentfromzero.
ThereisotherevidencethatsuggeststhatCushingconstraintsaffected
pricingoftheWTIcontract.Thefiguretitled“CLFront‐BackSpreadvs.USStocks”
plotsthenearby‐firstdeferredWTIspreadagainstthetotaloilstocksintheUnited
StatesreportedbytheEIAfortheJanuary,2000‐July,2009period.Noteagainthat
mostpointsinthefigureexhibitthetheoreticallypredictedrelation;higherstocks
areassociatedwithgreaterspreads.Indeed,duringtheperiodJanuary,2000‐
August,2008,thiscorrelationwas.6459.Giventhehighdegreeofaggregationof
thestockdata(whereaggregationisacrossspaceandgrades),thiscorrelationis
surprisinglyhigh.
However,thereareasetofpointsintheupperpartofthediagramthat
deviatequitenoticeablyfromthemainbodyofpointsinthescatterdiagram.These
pointswithhighspreadsandrelativelymoderatelevelsofinventories,correspond
totheheightofthefinancialcrisis,October,2008‐March,2009.Theyindicatethat
WTIspreadswerefarhigherduringthisperiodthanonewouldhavepredicted
24
given(a)thelevelofUSstocksobservedduringthisperiod,and(b)therelation
betweenUSstocksandspreadsfromtheperiodpriortothecrisis.Thisfurther
suggeststhatconstraintsatCushingwereaffectingthepricingoftheWTIcontract
duringtheheightofthefinancialcrisis.
ThecorrelationbetweenUSstocksandspreadsduringthisperiodprovides
additionalevidenceofthis.ThecorrelationbetweenUSstocksandspreadsduring
the1September,2008‐17July,2009periodwasonly.1613(incontrasttothe.6459
correlationobservedfrom2000totheendofAugust,2008).Thisprovides
evidencethatWTIpricesweremoregreatlyaffectedbyCushing‐specificfactors
duringthisperiod,thanhadbeenthecaseinprioryears.
ItisinterestingtonotethatBrentfuturesspreadsalsoexhibitedaweaker
relationwithfundamentals(asproxiedbystocks)duringtheperiodofthefinancial
crisis.Indeed,thedegradationintherelationbetweeninventoriesandspreadswas
morepronouncedforBrentthanforWTI.
Specifically,fromJanuary,2000‐August,2008,thecorrelationbetweenBrent
spreadsandUSinventorieswas.5207.ThisissmallerthantheWTI‐USstocks
correlation,butthisistobeexpectedasBrentismoreout‐of‐positionrelativetoUS
stocksthanisWTI.Nonetheless,thepositiverelationship(whichisalsostatistically
significant)isconsistentwiththeviewthatUSstocksrespondedtoglobalsupply‐
demandfactors,andthatBrentspreadsreflectedthesefundamentals.Duringthe
period1September,2008‐17July,2009,however,thecorrelationbecamenegative:
‐.5536tobeexact.ThisisdiametricallyopposedtothebehaviorofBrentspreads
priortothefinancialcrisis,andisnotwhatonewouldexpecttoobserveifBrent
25
spreadswerereflectingworld‐widesupply‐demandfundamentals.SinceUSand
OECDstocksexhibitedsimilarmovementsduringthistimeperiod,thisraises
questionsaboutwhetherBrentspreadsreflectedfundamentals(ascapturedby
OECDinventories)duringthisperiod.
Insum,thereisevidencethatthefinancialcrisishadamarkedeffectonthe
performanceofbothoilpricebenchmarks.Themostplausibleexplanationisthat
thecrisissharplycurtailedthedemandforoil.Giventheinelasticityofoil
productionintheveryshortrun,thissharpdemanddeclinecouldonlybe
accommodatedbyasharpdropinprices,andasubstantialincreaseininventoriesof
crude.InventoriesinCushingrosedramatically,apparentlyapproachingthe
effectivestoragecapacitythere.Asinventoriesapproachedeffectivestorage
capacity,themarginalcostofstorageatCushingbecameveryinelastic.Since
spreadswithlargepositiveinventorylevelsequalthemarginalcostofstorage,this
inelasticitymakesspreadsmorevolatile,sinceasaresultofthisinelasticitysmall
changesinstorage,orsmallchangesineffectivestoragecapacity(duetooperational
considerations),leadtosubstantialchangesinspreads.Theseeffectsareamplified
bytheeffectsofgreateruncertaintyandasharpincreaseinthedemandforstorage
ontransactionscostsinthemarketforphysicalstorage.
Thefigurelabeled“CushingStocks”depictsthemarkedincreaseinCushing
stocksstartinginearly‐October,2008.Stocksrosetothelargestabsolutelevel
observedinthesampleperiod,androsemorerapidlythanatanytimeduringthis
period.Moreover,itshouldbenotedthatthefractionofUSstocksheldinCushing
alsoroserapidly,toalevelnotobservedheretofore.Thisisillustratedinthefigure
26
labeled“CushingStocks/USStocks,”whichshowsthatthisratiorosetoarecord
highbyJanuary,2009,andtherateofincreasetoreachthathighmorewasmore
rapidthanobservedpreviously.
Therefore,thebehaviorinWTIfuturespricesandspreadsduringtheperiod
ofthefinancialcrisismostlikelyreflectedconstraintsontheCushingdeliverypoint
thatwereexacerbatedbyanunprecedenteddeclineindemand,andaconcomitant
unprecedentedincreaseininventories.8
VI. SummaryandConclusions
Thefinancialcrisisof2008‐2009hadapronouncedeffectonthebehaviorof
oilprices,andtheperformancesofthetwoprimarypricebenchmarks,WTIfutures,
andBrentfutures.Thecrisiswasassociatedwithadramaticincreaseinprice
volatility;awideningofspreads;anincreaseinthevolatilityofthesespreads;anda
declineinhedgingeffectiveness.Theseeffectswereevidentforfrontmonthand
secondmonthWTIandBrent,butweremostpronouncedforfrontmonthWTI,
especiallywithinafewdaysofcontractexpiration.
Thefinancialcrisiswasalsoassociatedwithanunprecedentedspikeinoil
inventoriesintheUnitedStatesandaroundtheworld,andattheWTIdeliverypoint
ofCushing,Oklahoma.Theeconomictheoryofstorablecommoditypricing,andthe
data,stronglysuggestthatthisphenomenonisconnectedwiththebehaviorofprice
benchmarksduringthefinancialcrisis.
8ItshouldbenotedthatoperatorsatCushingaddedapproximately8millionbarrelsofcapacityduring2008.
27
Specifically,inanefficientlyoperatingmarket,asharpdemanddeclinelike
thatcausedbythefinancialcrisisshouldleadtoalargeincreaseininventory.This
largeaccumulationcancausestockstoapproachcapacityconstraintsatapointlike
Cushing.AlthoughstorageatCushingwaslessthannominalcapacitythereeven
wheninventoriespeaked,thedatasuggestthatCushingwaseffectivelyconstrained,
andthatasaresult,thesupplyofstoragewasextremelyinelastic.Since(a)ina
marketwithlargestoragenearby‐deferredspreadspricethemarginalcostof
storage,and(b)whenthemarginalcostofstorageishighlyinelastic,small
fundamentalshockshavelargeeffectsonthismarginalcost,then(c)such
fundamentalshockswillhavelargeeffectsonspreads.Moreover,thedramatic
increaseinuncertaintyandanincreaseinthedemandforstoragelikelyincreased
transactionscosts,andthedispersionandvolatilityofnegotiatedstorageratesat
Cushing.
Thus,thebehaviorofpricingbenchmarksduringtheperiodofthefinancial
crisiswasdrivenbytheextraordinarycircumstancesofthatperiod,andarenota
harbingerofperformanceundermorenormalcircumstances.
Itshouldbeemphasizedthattheseeffectswereconcentratedduringthe
periodofsevereworldwideeconomiccontractionandextremevolatilityinthe
autumnof2008andthewinterof2008‐2009.Theperformanceofthepricing
benchmarkshadlargelyreturnedtopre‐crisislevelsbyearly‐spring,2009.
ForbothWTIandBrent,thereisevidencethattechnicalfactorsassociated
withexpirationinjectadditionalvolatilityintothepriceintheexpiringfuture.
TheseproblemsweremoresevereforWTIduringtheperiodofthefinancialcrisis,
28
likelyduetothefactthattheaforementionedconstraintsatCushingexacerbatedthe
effectsofexpiration‐driventechnicalfeatures.ThesimilarbehaviorofWTS
suggeststhatthisphenomenonwascausedbyfundamentalconditionsinthe
Midcontinentmarket,ratherthanfactorsspecifictotheNYMEXWTIfutures
contract.Althoughnotimmaterial,theimportanceofthisisdiminishedbythefact
thatmostinteresthasrolledtothenext‐expiringcontractwellbeforetheseeffects
becomemanifest.
Evenduringtheheightofthefinancialcrisis,WTIpricingrelationships
continuedtoco‐varywithfundamentalsaspredictedbyeconomictheory.In
particular,spreadswidenedasinventories(USandCushing)declined(andvice
versa),althoughthisrelationwasweakerthanthatobservedpriortothecrisis.In
contrast,inareversalfrompre‐crisisbehavior,duringthecrisis,Brentspreads
exhibitedanegativecorrelationwithinventories(USandCushing);thisisopposite
fromwhatonewouldexpectedtoobserveinacompetitivemarketthataccurately
reflectsfundamentals.Thissuggeststhatanydivergencesbetweenthehedging
performanceofWTIandBrentarenotclearlyattributabletothelatterreflecting
fundamentalsandtheformernot.Infact,thestock‐spreadrelationsuggeststhatthe
oppositeisthecase.
CL Front-LLS Variance (BCAG)
0
0.005
0.01
0.015
0.02
0.025
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Date
FrontCash
CL Front-Back Log Difference
-0.2
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
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5
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5
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05
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08
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9
Date
CB Front-Back Log Difference
-0.08
-0.07
-0.06
-0.05
-0.04
-0.03
-0.02
-0.01
0
0.01
0.02
7/18
/200
5
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/200
5
11/1
8/20
05
1/18
/200
6
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9
Date
US Oil Nearby- First Deferred Spreads
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
3-Nov-08
10-Nov-08
17-Nov-08
24-Nov-08
1-Dec-08
8-Dec-08
15-Dec-08
22-Dec-08
29-Dec-08
5-Jan-09
12-Jan-09
19-Jan-09
26-Jan-09
2-Feb-09
9-Feb-09
16-Feb-09
23-Feb-09
WTS LLS WTI NYMEX WTI
CL-Dated Brent Rolling Correlation
0.3000
0.4000
0.5000
0.6000
0.7000
0.8000
0.9000
1.0000
3/20
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Date
FrontBack
CL-Dubai Rolling Correlation
0.0000
0.1000
0.2000
0.3000
0.4000
0.5000
0.6000
0.7000
0.8000
0.9000
1.0000
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Date
FrontBack
CL-LLS Rolling Correlation
0.6000
0.6500
0.7000
0.7500
0.8000
0.8500
0.9000
0.9500
1.0000
3/20
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0
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FrontBack
CL-MARS Rolling Correlation
0.6000
0.6500
0.7000
0.7500
0.8000
0.8500
0.9000
0.9500
1.0000
8/17
/199
9
12/1
7/19
99
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Date
FrontBack
CL GCG Correlation
0.0000
0.1000
0.2000
0.3000
0.4000
0.5000
0.6000
0.7000
0.8000
0.9000
1.0000
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8
3/20
/199
9
3/20
/200
0
3/20
/200
1
3/20
/200
2
3/20
/200
3
3/20
/200
4
3/20
/200
5
3/20
/200
6
3/20
/200
7
3/20
/200
8
3/20
/200
9
Date
FrontBack
CB-Dated Brent Rolling Correlation
0.5000
0.5500
0.6000
0.6500
0.7000
0.7500
0.8000
0.8500
0.9000
0.9500
1.0000
3/27
/199
0
3/27
/199
1
3/27
/199
2
3/27
/199
3
3/27
/199
4
3/27
/199
5
3/27
/199
6
3/27
/199
7
3/27
/199
8
3/27
/199
9
3/27
/200
0
3/27
/200
1
3/27
/200
2
3/27
/200
3
3/27
/200
4
3/27
/200
5
3/27
/200
6
3/27
/200
7
3/27
/200
8
3/27
/200
9
Date
FrontBack
CB-Dubai Rolling Correlation
0.0000
0.1000
0.2000
0.3000
0.4000
0.5000
0.6000
0.7000
0.8000
0.9000
1.0000
3/20
/199
0
3/20
/199
1
3/20
/199
2
3/20
/199
3
3/20
/199
4
3/20
/199
5
3/20
/199
6
3/20
/199
7
3/20
/199
8
3/20
/199
9
3/20
/200
0
3/20
/200
1
3/20
/200
2
3/20
/200
3
3/20
/200
4
3/20
/200
5
3/20
/200
6
3/20
/200
7
3/20
/200
8
3/20
/200
9
Date
FrontBack
CB-Singapore Rolling Correlation
0.0000
0.1000
0.2000
0.3000
0.4000
0.5000
0.6000
0.7000
0.8000
0.9000
1.0000
3/20
/199
0
3/20
/199
1
3/20
/199
2
3/20
/199
3
3/20
/199
4
3/20
/199
5
3/20
/199
6
3/20
/199
7
3/20
/199
8
3/20
/199
9
3/20
/200
0
3/20
/200
1
3/20
/200
2
3/20
/200
3
3/20
/200
4
3/20
/200
5
3/20
/200
6
3/20
/200
7
3/20
/200
8
3/20
/200
9
Date
FrontBack
CL Front-Brent Correlation (GARCH BCAG)
0.4
0.5
0.6
0.7
0.8
0.9
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CL Back-Brent Correlation (GARCH BCAG)
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CL Front-Dubai Correlation (GARCH BCAG)
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CL Back-Dubai Correlation (GARCH BCAG)
0.4
0.5
0.6
0.7
0.8
0.9
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CL Front-GCG Correlation (GARCH BCAG)
0.4
0.5
0.6
0.7
0.8
0.9
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CL Back-GCG Correlation (GARCH BCAG)
0.4
0.5
0.6
0.7
0.8
0.9
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CL Front-LLS Correlation (GARCH BCAG)
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CL Back-LLS Correlation (GARCH BCAG)
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CL Back-Dated Brent Correlation (BCAG)
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CL Front-Dated Brent Correlation (BCAG)
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CL Front-GCG Correlation (BCAG)
0.4
0.5
0.6
0.7
0.8
0.9
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CL Front-GCG Correlation (BCAG)
0.4
0.5
0.6
0.7
0.8
0.9
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CL Back-MARS Correlation (BCAG)
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
8/10
/199
9
12/1
0/19
99
4/10
/200
0
8/10
/200
0
12/1
0/20
00
4/10
/200
1
8/10
/200
1
12/1
0/20
01
4/10
/200
2
8/10
/200
2
12/1
0/20
02
4/10
/200
3
8/10
/200
3
12/1
0/20
03
4/10
/200
4
8/10
/200
4
12/1
0/20
04
4/10
/200
5
8/10
/200
5
12/1
0/20
05
4/10
/200
6
8/10
/200
6
12/1
0/20
06
4/10
/200
7
8/10
/200
7
12/1
0/20
07
4/10
/200
8
8/10
/200
8
12/1
0/20
08
4/10
/200
9
CL Front-LLS Correlation (BCAG)
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CL Back-LLS Correlation (BCAG)
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CL Front-MARS Correlation (BCAG)
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
8/10
/199
9
12/1
0/19
99
4/10
/200
0
8/10
/200
0
12/1
0/20
00
4/10
/200
1
8/10
/200
1
12/1
0/20
01
4/10
/200
2
8/10
/200
2
12/1
0/20
02
4/10
/200
3
8/10
/200
3
12/1
0/20
03
4/10
/200
4
8/10
/200
4
12/1
0/20
04
4/10
/200
5
8/10
/200
5
12/1
0/20
05
4/10
/200
6
8/10
/200
6
12/1
0/20
06
4/10
/200
7
8/10
/200
7
12/1
0/20
07
4/10
/200
8
8/10
/200
8
12/1
0/20
08
4/10
/200
9
Date
CB Front-Brent Correlation (GARCH BCAG)
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CB Back-Brent Correlation (GARCH BCAG)
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CB Front-Dubai Correlation (GARCH BCAG)
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CB Back-Dubai Correlation (GARCH BCAG)
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CB Back-Gasoil Correlation (GARCH BCAG)
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
12/1
3/19
89
12/1
3/19
90
12/1
3/19
91
12/1
3/19
92
12/1
3/19
93
12/1
3/19
94
12/1
3/19
95
12/1
3/19
96
12/1
3/19
97
12/1
3/19
98
12/1
3/19
99
12/1
3/20
00
12/1
3/20
01
12/1
3/20
02
12/1
3/20
03
12/1
3/20
04
12/1
3/20
05
12/1
3/20
06
12/1
3/20
07
12/1
3/20
08
Date
CB Front-Gasoil Correlation (GARCH BCAG)
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
12/1
3/19
89
12/1
3/19
90
12/1
3/19
91
12/1
3/19
92
12/1
3/19
93
12/1
3/19
94
12/1
3/19
95
12/1
3/19
96
12/1
3/19
97
12/1
3/19
98
12/1
3/19
99
12/1
3/20
00
12/1
3/20
01
12/1
3/20
02
12/1
3/20
03
12/1
3/20
04
12/1
3/20
05
12/1
3/20
06
12/1
3/20
07
12/1
3/20
08
Date
CB Front-Singapore Correlation (GARCH BCAG)
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CB Back-Singapore Correlation (GARCH BCAG)
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CB Front-Dated Brent Correlation (BCAG)
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CB Back-Dated Brent Correlation (BCAG)
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CB Front-Dubai Bag Correlation (BCAG)
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CB Back- Dubai (BCAG)
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CB Front-Gasoil Correlation (BCAG)
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
12/1
3/19
89
12/1
3/19
90
12/1
3/19
91
12/1
3/19
92
12/1
3/19
93
12/1
3/19
94
12/1
3/19
95
12/1
3/19
96
12/1
3/19
97
12/1
3/19
98
12/1
3/19
99
12/1
3/20
00
12/1
3/20
01
12/1
3/20
02
12/1
3/20
03
12/1
3/20
04
12/1
3/20
05
12/1
3/20
06
12/1
3/20
07
12/1
3/20
08
Date
CB Back-Gasoil Correlation (BCAG)
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
12/1
3/19
89
12/1
3/19
90
12/1
3/19
91
12/1
3/19
92
12/1
3/19
93
12/1
3/19
94
12/1
3/19
95
12/1
3/19
96
12/1
3/19
97
12/1
3/19
98
12/1
3/19
99
12/1
3/20
00
12/1
3/20
01
12/1
3/20
02
12/1
3/20
03
12/1
3/20
04
12/1
3/20
05
12/1
3/20
06
12/1
3/20
07
12/1
3/20
08
Date
CB Front-Singapore ( BCAG)
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
CB Back-Singapore Correlation (BCAG)
0.3
0.35
0.4
0.45
0.5
0.55
0.6
3/13
/199
0
3/13
/199
1
3/13
/199
2
3/13
/199
3
3/13
/199
4
3/13
/199
5
3/13
/199
6
3/13
/199
7
3/13
/199
8
3/13
/199
9
3/13
/200
0
3/13
/200
1
3/13
/200
2
3/13
/200
3
3/13
/200
4
3/13
/200
5
3/13
/200
6
3/13
/200
7
3/13
/200
8
3/13
/200
9
Date
10 15 20 25 30 35-2
0
2
4
6
8
10
Stocks
Spr
ead
CL Front-Back Spread vs. Cushing Stocks
260 280 300 320 340 360 380-4
-2
0
2
4
6
8
10CL Front-Back Spread vs. US Stocks
Stocks
Spr
ead
Cushing Stocks
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.004/
9/20
04
6/9/
2004
8/9/
2004
10/9
/200
4
12/9
/200
4
2/9/
2005
4/9/
2005
6/9/
2005
8/9/
2005
10/9
/200
5
12/9
/200
5
2/9/
2006
4/9/
2006
6/9/
2006
8/9/
2006
10/9
/200
6
12/9
/200
6
2/9/
2007
4/9/
2007
6/9/
2007
8/9/
2007
10/9
/200
7
12/9
/200
7
2/9/
2008
4/9/
2008
6/9/
2008
8/9/
2008
10/9
/200
8
12/9
/200
8
2/9/
2009
4/9/
2009
6/9/
2009
Date
mbb
l
Cushing Stocks/US Stocks
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
4/9/
2004
6/9/
2004
8/9/
2004
10/9
/200
4
12/9
/200
4
2/9/
2005
4/9/
2005
6/9/
2005
8/9/
2005
10/9
/200
5
12/9
/200
5
2/9/
2006
4/9/
2006
6/9/
2006
8/9/
2006
10/9
/200
6
12/9
/200
6
2/9/
2007
4/9/
2007
6/9/
2007
8/9/
2007
10/9
/200
7
12/9
/200
7
2/9/
2008
4/9/
2008
6/9/
2008
8/9/
2008
10/9
/200
8
12/9
/200
8
2/9/
2009
4/9/
2009
6/9/
2009
Date
