Saudi Crude Oil Price Integration with World Main Markets and the Law of One Price

Abstract

Abstract. This paper aims to test the co-integration of Saudi Light Crude Oil (SAL) prices with the major worldmarkets: Dubai Vetch (DV), West Texas Intermediate (WTI), and Europe Brent Spot (EBS). The study usesJohansen and Juselius’ (1990) co-integration and vector error correction (VECM) methods to determine if thesemarkets are co-integrated, the markets’ degree of response to one another, and whether the law of one price (LOP)holds true. The results of the study indicate that all four markets are co-integrated. In the VECM estimations, theaverage value of the error-correction coefficients in the four estimated equations is 0.18, which means that a 1%deviation from equilibrium leads to a 0.18% price adjustment in the long-run equilibrium. The short-runcoefficients are not significant in all equations; the one exception is for WTI, indicating that WTI’s price ofinfluences the others’ prices but not vice versa. Thus, a unidirectional causality runs from WTI’s price to theothers’ prices. In addition, the LOP was completely refuted in all tested markets.