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 p roducts during the period 1992-1998. Specifically, we explore the existence of long-run equilibrium price relationships, and whether deviations from e stimated equilibrium can be utilized for predictions of short-term price ch anges and for risk management. The econometric evidence strongly supports t he hypothesis that crude and product prices are co-integrated. Past deviati ons from long-term equilibrium are significant in an error correction speci fication of short-term product price changes. The results represent valuabl e information for hedging, particularly in integrated oil companies for whi ch price risk is related to margin variations. (C) 1999 Elsevier Science B. V. All rights reserved. JEL classification: E32.