Oil and Product Price Dynamics in International Petroleum Markets

Authors: Alessandro Lanza, Matteo Manera, Massimo Giovannini

Year: 2003

Series: FEEM Working Paper  n.2003.081

ISSN: 2037-1209

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

JEL n.: C22, D40, E32

 

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.

Oil and Product Price Dynamics in International Petroleum Markets