The Relationship Between Crude Oil and Oil Products Prices

Abstract:

The main goal of this paper is to examine the relationship between crude oil and oil product prices. Many observers have attributed to part of spike in oil products price is because of lack of competition and demand and supply which prompts sellers to increase prices hence increased profit margins. However, according to Bacon (1991), noted the relationship between crude oil and oil product prices appear to be asymmetrical, “rockets and feathers” pattern whereby when price of crude oil goes up, the price of oil products go up like a rocket but when the price of crude oil goes down, the price of the oil products will move down sluggishly like a feather. Therefore, we will explore the price relationship of crude oil and oil products in long-term and also find out if any deviations in prices can be used to predict short-term price changes. We will examine the behavior of individual crude oil and oil products prices using time series techniques. Also we will implement strategies that will reduce the spreads.

Table of contents

Abstract: ..................................................................................................................................... ii

Table of contents ....................................................................................................................... iii

List of Acronyms ....................................................................................................................... v

1. Introduction ............................................................................................................................1

2. Literature Review ...................................................................................................................1

3. Theoretical Framework ..........................................................................................................3

4. Data ........................................................................................................................................4

4.1. WTI and Gasoline ...........................................................................................................5

4.1.1. Plots for WTI and Gasoline Price Series ..................................................................5

4.1. 2.Time Series for WTI and Gasoline ............................................................................6

4.1.3. Q-Q Plots for WTI and Gasoline ..............................................................................7

4.1.4.Kernel Density plots comparing the price series to the normal distributions for WTI and Gasoline ..............................................................................................................8

4.2.Brent and Gasoline ...........................................................................................................9

4.2.1. Plots for Brent and Gasoline Price Series ................................................................9

4.2.2. Q-Q Plots for Brent and Gasoline ......................................................................... 10

4.2.3. Time Series for Brent and Gasoline ...................................................................... 11

4.2.4. Kernel densities plots comparing the return series to the closest normal distribution for Brent and Gasoline ................................................................................. 12

4.3. Bonny Light and Gasoline ........................................................................................... 12

4.3.1. Plots for Bonny Light and Gasoline Price Series .................................................. 12

4.3.2. Time Plots for Bonny Light and Gasoline............................................................. 13

4.3.3. Q-Q Plots for Bonny Light and Gasoline .............................................................. 14

4.3.4. Kernel densities plots comparing the return series to the closest normal distributions for Bonny Light and Gasoline .................................................................... 14

5. Methodology ....................................................................................................................... 15

5.1. WTI and Gasoline ........................................................................................................ 15

5.1.1. Summary (VAR_model) ....................................................................................... 15

5.1.2. Summary (jotest1) ................................................................................................. 17

5.1.3. Summary (VECM_fit2) ........................................................................................ 17

iv

5.2. Brent and Gasoline ....................................................................................................... 18

5.2.1. Summary (VAR_model) ....................................................................................... 18

5.2.2. Summary (jotest1) ................................................................................................. 19

5.2.3. Summary (VECM_fit2) ........................................................................................ 20

5.3. Bonny Light and Gasoline ........................................................................................... 20

5.3.1. Summary (VAR_model) ....................................................................................... 20

5.3.2. Summary (jotest1) ................................................................................................. 21

5.3.3. Summary (VECM_fit2) ........................................................................................ 22

6. Results ................................................................................................................................. 22

7. Conclusion .......................................................................................................................... 23

8. References ........................................................................................................................... 24