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Co-integration of ICE Gas oil and Crude oil futures

  • Westgaard, Sjur
  • Estenstad, Maria
  • Seim, Maria
  • Frydenberg, Stein
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    In this paper, the relationship between Gas oil and Brent Crude oil futures prices is investigated. The analysis is based on daily price series for five different contract lengths traded on ICE Futures Europe. The price series and their first differences are tested for stationarity. Linear relationships between the pair-wise Gas oil and Crude oil contracts are then tested for co-integration. A co-integrated relationship is found for the 1 and 2 month contracts covering data from 1994 to 2009, and Error Correction Models are established to estimate the relationships. No co-integrated relationships are found for the 3, 6 and 12 month contracts covering the period 2002-2009, nor for the 1 and 2 month contracts for this period. The futures prices for this period are collected from a volatile market, including hurricane Katrina, the economic boom and the following financial crises which might explain these results. Thus, in such volatile periods the spread between Gas oil and Crude oil is likely to deviate, and it might take several years until it reverts to its equilibrium value. For energy traders and hedgers, this will imply that exposures to the crack spread should be treated with great care in such market environments.

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    File URL: http://www.sciencedirect.com/science/article/B6V7G-51J9DM7-2/2/ffc34ec66275ded85a6bd4e41190fc16
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    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 33 (2011)
    Issue (Month): 2 (March)
    Pages: 311-320

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    Handle: RePEc:eee:eneeco:v:33:y:2011:i:2:p:311-320
    Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

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    1. Murat, Atilim & Tokat, Ekin, 2009. "Forecasting oil price movements with crack spread futures," Energy Economics, Elsevier, vol. 31(1), pages 85-90, January.
    2. Michael S. Haigh & Matthew T. Holt, 2002. "Crack spread hedging: accounting for time-varying volatility spillovers in the energy futures markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(3), pages 269-289.
    3. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
    4. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    5. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
    6. 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.
    7. 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.
    8. Serletis, Apostolos, 1994. "A cointegration analysis of petroleum futures prices," Energy Economics, Elsevier, vol. 16(2), pages 93-97, April.
    9. 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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