Causality Between Brent and West Texas Intermediate: The Effects of COVID-19 Pandemic and Russia–Ukraine War

The article analyzes the Granger-based causal relationship between two major crude oil markets, namely Brent and West Texas Intermediate (WTI), by using the standard vector autoregression (VAR) framework. In this regard, the effects of the COVID-19 pandemic and the Russia–Ukraine war on causality between Brent and WTI are examined. The empirical results from Granger-causality tests show (a) strong causality from Brent to WTI during the period prior to the COVID-19 pandemic and Russia–Ukraine war, (b) no causality from WTI to Brent during the period prior to the COVID-19 pandemic and Russia–Ukraine war, (c) no causality from Brent to WTI during the COVID-19 pandemic, (d) evidence of causality from WTI to Brent during the COVID-19 pandemic, and (e) no evidence of causality from both markets during the period of Russia–Ukraine war. In addition, causality tests in quantiles support results from the linear Granger causality tests in general. However, contrary to the standard linear causality test, the quantile-in-regression causality test shows that Brent returns cause WTI returns during the pandemic period and WTI returns cause Brent returns before the pandemic. Furthermore, the results from the time-varying Granger causality tests support all conclusions from the standard linear (and static) Granger causality test, except the hypothesis that Brent causes WTI during the pandemic. Moreover, the time-varying Granger tests show evidence that causality between Brent and WTI clearly varies across the pandemic and war periods. Revealing the causalities between Brent and WTI across periods of economic and political stability, pandemic, and war would help policymakers develop appropriate energy policy and help investors determine appropriate risk management actions.