Co-integration of ICE Gas oil and Crude oil futures
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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