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Oil and Product Price Dynamics in International Petroleum Markets

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Author Info

  • Alessandro Lanza

    (Eni S.p.A., Roma, Fondazione Eni Enrico Mattei, Milano and CRENoS, Cagliari, Italy)

  • Matteo Manera

    (Department of Statistics, University of Milano-Bicocca, Italy and Fondazione Eni Enrico Mattei, Milano, Italy)

  • Massimo Giovannini

    (Fondazione Eni Enrico Mattei, Milano, Italy)

Abstract

In this paper we investigate crude oil and products price dynamics. We present a comparison among ten price series of crude oils and fourteen price series of petroleum products, considering four distinct market areas (Mediterranean, North Western Europe, Latin America and North America) over the period 1994-2002. We provide first a complete analysis of crude oil and product price dynamics using cointegration and error correction models. Subsequently we use the error correction specification to predict crude oil prices over the horizon January 2002-June 2002.The main findings of the paper can be summarized as follows: a) differences in quality are crucial to understand the behaviour of crudes; b) prices of crude oils whose physical characteristics are more similar to the marker show the following regularities: b1) they converge more rapidly to the long-run equilibrium; b2) there is an almost monotonic relation between Mean Absolute Percentage Error values and crude quality, measured by API° gravity and sulphur concentration; c) the price of the marker is the driving variable of the crude price also in the short-run, irrespective of the specific geographical area and the quality of the crude under analysis.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2003.81.

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Date of creation: Sep 2003
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Handle: RePEc:fem:femwpa:2003.81

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Keywords: Oil prices; Product prices; Error correction models; Forecasting;

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References

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  1. Gjolberg, Ole & Johnsen, Thore, 1999. "Risk management in the oil industry: can information on long-run equilibrium prices be utilized?," Energy Economics, Elsevier, vol. 21(6), pages 517-527, December.
  2. Asche, Frank & Gjolberg, Ole & Volker, Teresa, 2003. "Price relationships in the petroleum market: an analysis of crude oil and refined product prices," Energy Economics, Elsevier, vol. 25(3), pages 289-301, May.
  3. James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
  4. Adrangi, Bahram & Chatrath, Arjun & Raffiee, Kambiz & D. Ripple, Ronald, 2001. "Alaska North Slope crude oil price and the behavior of diesel prices in California," Energy Economics, Elsevier, vol. 23(1), pages 29-42, January.
  5. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
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Cited by:
  1. Candelon, Bertrand & Joëts, Marc & Tokpavi, Sessi, 2013. "Testing for Granger causality in distribution tails: An application to oil markets integration," Economic Modelling, Elsevier, vol. 31(C), pages 276-285.
  2. Bertrand Candelon & Marc Joëts & Sessi Tokpavi, 2012. "Testing for crude oil markets globalization during extreme price movements," EconomiX Working Papers 2012-28, University of Paris West - Nanterre la Défense, EconomiX.
  3. Mario Denni & G. Frewer, 2006. "New evidence on the relationship beetween crude oil and petroleum product prices," Departmental Working Papers of Economics - University 'Roma Tre' 0061, Department of Economics - University Roma Tre.

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