International Oil Market Risk Anticipations and the Cushing Bottleneck: Option-Implied Evidence

We study the equilibrium relationship between the WTI and the Brent crude oil indexes in prices and in option-implied moments using fractional cointegration models from 2008-2016. This period has been subject to changing constraints in terms of rising US inventories and falling demand. Our results suggest there exists a cointegrating relationship in prices as well as between risk-neutral moments. While a long-lasting spread in prices is not supported by the data, our results support a significant volatility differential between the two oil indexes. The Cushing bottleneck is linked to slower speeds of adjustment to disequilibrium for both indexes as well as a fragmentation of the international equilibrium for tail and crash risk, especially for longer horizons. Crash and tail risk are more locally driven and less affected by the international equilibrium than are price and volatility.