Evolution of the international crude oil market mechanism

This study explains how the international crude oil market mechanism has evolved. It suggests a systematic approach to analyse the hypothesis of the integration of the international oil market, the structural changes in oil price movements and the benchmark role of specific crude, which have been separately discussed in previous studies. We analyse weekly spot prices of Dubai, Brent and West Texas Intermediate (WTI) from January 1997 to July 2012. First, the empirical results of the cointegration test taking a structural break into account show that all the bivariate combinations of these three crude oil prices are cointegrated and that most of the structural breaks occur in 2009. These cointegrating relationships thus indicate that the international crude oil market is integrated. Second, considering the structural breaks suggested by the cointegration test results and the timing of the price reversal between different crudes, the causal relationships before 2009 and those afterwards are compared. Before 2009, bidirectional causality is observed for all the bivariate combinations of the Dubai, Brent and WTI prices. However, the Dubai price unidirectionally causes the Brent and WTI prices thereafter. This result implies that the Dubai price has played a benchmark role in the international crude oil market since 2009.