Evaluation of Effectiveness of crack spread futures in crude oil price forecast

Subject Areas : Journal of Investment Knowledge

Mohammad Alimoradi ¹ , Solmaz Mohajeri ^{2 *}

1 - دانشجوی دکتری اقتصاد نفت و گاز دانشگاه علامه طباطبایی
2 - کارشناسی ارشد ریاضیات مالی دانشگاه علامه طباطبایی

Received: 2015-09-09 Accepted : 2015-12-15 Published : 2016-03-20

Keywords: oil price, oil futures, crack spread,

Abstract :

In the oil markets, crack spread refers to the relationship between crude oil price and the price of its distillated product in refiners. Refiners are the major part of oil markets and are exposed to crack spread. Furthermore, oil customers are active participants in oil hedging markets and they are exposed to the Crack Spread. Investment funds mainly use crack spread for speculating and making profits in oil markets. Regarding the high volume of trading crack spread futures in oil markets, this question arises; whether futures of crack spread can be a good predictor of oil price movements or not. At first, we examine the relationship between futures and spot oil price by using a Vector Error Correction Model (VECM). This study shows that, there is causal relationship between crack spread futures and spot oil price in bull oil market, but in bear oil market the causal relationship becomes weaker. Ultimately, the effectiveness of crack spread futures is compared to forecasts of oil price. The results show that crack spread futures are good predictors of crude oil price.

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