The Future Is Now: Evidence from Crude Oil Futures Trading

The global crude oil markets have gained fervent academic attention since Adelman’s (1984) claim of a “great pool”. Recently, the Shanghai International Energy Exchange became one of the largest trading venues in the world within less than a year since the listing of crude oil futures. In this research, using the frameworks of the vector autoregression and vector error correction models, we analyze the co-movement of crude oil futures prices among Shanghai crude, Brent crude, and West Texas Intermediate (WTI) crude. We find that Shanghai Granger-causes Brent and WTI, but not vice versa. Moreover, vector autoregression and vector error correction models imply that nearly half of Brent and WTI fluctuations originates from Shanghai and the influence peaks out on the fourth trading day following the initial shock. This research contributes to the literature as a documentation of China’s leadership in the price discovery of futures prices of crude oil fragmented across the world.