Risk management in the oil industry: can information on long-run equilibrium prices be utilized?

We analyze co-movements between the prices of crude oil and major refined products during the period 1992-1998. Specifically, we explore the existence of long-run equilibrium price relationships, and whether deviations from estimated equilibrium can be utilized for predictions of short-term price changes and for risk management. The econometric evidence strongly supports the hypothesis that crude and product prices are co-integrated. Past deviations from long-term equilibrium are significant in an error correction specification of short-term product price changes. The results represent valuable information for hedging, particularly in integrated oil companies for which price risk is related to margin variations. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classification: E32.