Modeling and forecasting cointegrated relationships among heavy oil and product prices

Authors: Lanza A., Manera M., Giovannini M.

Journal: Energy Economics

Publisher: Elsevier

Year: 2005

Volume: 27

Pages: 831-848

Keywords: Heavy oil prices; Product prices; Error correction models; Forecasting

JEL: C22; D40; E32




In this paper we investigate heavy crude oil and product price dynamics. We present a comparison among ten prices series of heavy crude oils and fourteen price series of petroleum products in two distinct areas (Europe and Americas) over the period 1994–2002. We provide a complete analysis of crude oil and product price dynamics using cointegration and error correction models (ECM). Subsequently we use the ECM specification to predict crude oil prices over the horizon January 2002–June 2002. Finally we compare the forecasting performance of ECM with a naïve model in first differences which does not exploit any cointegrating relation.