Physical Markets, Paper Markets and the WTI-Brent Spread

We document that, starting in the Fall of 2008, the benchmark West Texas Intermediate (WTI) crude oil has periodically traded at unheard-of discounts to the corresponding Brent benchmark. We further document that this discount is not reflected in spreads between Brent and other benchmarks that are directly comparable to WTI. Drawing on extant models linking oil inventory conditions to the futures term structure, we test empirically several conjectures about how calendar and commodity spreads (nearby vs. first-deferred WTI; nearby Brent vs. WTI) should move over time and be related to storage conditions at Cushing. We then investigate whether, after controlling for macroeconomic and physical market fundamentals, spread behavior is partly predicted by the aggregate oil futures positions of commodity index traders.